Key Highlights

● Microsoft ended roughly flat after an early rally faded on October 29.

● Fiscal first-quarter Revenue rose to $92.3 billion and Earnings came in at $4.89 a share.

● Capital spending of $45.2 billion fell below the roughly $50 billion consensus.

● Microsoft guided second-quarter capex above $50 billion.

Microsoft (NASDAQ:MSFT)'s quarter impressed on growth and cash flow, but an early rally faded on Thursday as the market wrestled with the cost of the AI buildout.

From pop to flat

Microsoft looked like the big winner of tech earnings week when it reported on Wednesday evening. The stock jumped in extended trading and was still higher before Thursday's open. By the close on October 29, though, Microsoft had ended roughly flat, according to market data.

The path there was bumpy. One report had the stock trading lower around midday at $522.92, before it recovered toward the unchanged line by the close.

A beat across the board

The fiscal first-quarter numbers were strong. Revenue rose to $92.3 billion, and earnings came in at $4.89 a share, above the $4.72 expected, according to market data. Microsoft Cloud revenue reached $63.9 billion.

"Our results exceeded expectations across revenue, operating income, and earnings per share," chief financial officer Amy Hood said. Chief executive Satya Nadella called Copilot "the new OS for work," according to one report.

One media report described the quarter as "a big cash-flow beat."

Azure keeps humming

Azure, Microsoft's Cloud Computing platform, remained the star. Growth stayed rapid in the quarter, though sources differed slightly on the exact pace. For the fiscal second quarter, Microsoft guided Azure growth in constant currency to hold at or slightly above that rate, according to market commentary. It also guided revenue to $96 billion to $97.1 billion.

The capex surprise

The more unusual detail was Capital spending. Microsoft spent $45.2 billion including finance leases, below the roughly $50 billion consensus. Cash spending on property and equipment was $39.4 billion. According to one report, Microsoft attributed the shortfall to delayed third-party capacity, and Hood said customer Demand "continues to exceed available supply."

Microsoft guided second-quarter capex above $50 billion.

For investors worried about AI costs, lighter spending and strong Cash Flow were welcome. One market commentator said, "Microsoft provided both, and that eased some of the worry about what its growth is going to cost."

Elsewhere in the AI trade, market reports said AI-cloud names such as Nebius (NASDAQ:NBIS) and CoreWeave (NASDAQ:CRWV) fell amid worries about financing for heavy data-center spenders.

Caught in Alphabet's wake

The fading rally reflected a market in no mood to chase Big Tech. Alphabet (NASDAQ:GOOGL) suffered its worst day since its 2004 IPO, erasing about $500 billion in Market Value after results that media reports said "reignited concerns over mounting AI costs." The Nasdaq Composite tumbled 365.13 points to 26,184.72, and the Nasdaq-100 fell to 29,402.51.

Microsoft's ability to hold steady while Alphabet collapsed showed how sharply investors are now distinguishing between AI spenders. One market analyst said that "markets are no longer rewarding companies simply for investing heavily in AI."

Meanwhile, more than 400 S&P 500 members rose, and the Russell 2000 climbed 28.71 points to 2,859.22 as money rotated into health care, utilities and real estate.

What to watch

The next test is whether Microsoft can deliver on its Azure guidance while ramping capex above $50 billion. Investors will watch whether Supply constraints ease and how quickly spending catches up to demand.

Amazon (NASDAQ:AMZN)'s after-hours slide on Thursday, tied to its $220 billion capex plan and negative free cash flow, will shape how the market views cloud peers on Friday. The third-quarter Employment Cost index and the Fed's December 8 to 9 meeting add a rates backdrop for richly valued tech.