- Google Cloud outpaced Azure’s growth, but Alphabet shares tumbled while Microsoft’s held steady
- Alphabet’s negative free cash flow and slowing Search growth put its AI spending under scrutiny
- Analysts see a clearer AI growth story at Microsoft, though both companies must turn infrastructure investment into lasting returns
Google Cloud revenue more than doubled year on year in calendar Q3, beating out Microsoft Azure’s healthy 48% growth. And yet Microsoft stock remained relatively flat on Thursday while Google parent company Alphabet’s dropped more than 10%. What gives?
There are a few different factors driving the difference in reactions. Specifically, Alphabet reported its second straight quarter of negative free cash flow thanks to spending on its data center buildout, with this number actually increasing sequentially from -$5.9 billion to -$9 billion.
Additionally, while CFO Anat Ashkenazi said AI investments in search are driving “our highest query growth in half a decade,” that growth hasn’t necessarily translated into revenue. Revenue growth in Search – a core segment for the company – slowed from 17% in Q2 to 12% in Q3.
Search remains more than double the size of Alphabet’s Google Cloud business, with $63.4 billion in revenue in Q3.
In contrast, Microsoft’s free cash flow remained in the black at $18.6 billion despite its capex jumping $10.3 billion year on year to $34.9 billion.
Beyond revenue growth, Microsoft has ruthlessly been chasing efficiency, earlier this month offering a voluntary buyout program to 60,000 employees (approximately 27% of its workforce).
“The real benefit of efficiency is stability, its security, its reliability, is that it delivers the highest quality unit at the lowest possible cost,” Microsoft CFO Amy Hood said. “It is a real focus in terms of operating expense to make sure it’s going toward building the new thing or providing security and quality.”
Analyst takes
Put it all together, and Microsoft seems to have an edge in investors’ minds.
“Microsoft currently has the cleaner AI growth story, with spending supporting strong Azure demand and a large contracted revenue base,” PP Foresight Founder and Analyst Paolo Pescatore explained. “Alphabet’s position is more complex: AI is powering exceptional Cloud growth while simultaneously forcing the company to reinvent the Search business that underpins its economics. Alphabet is funding its next growth engine while defending its most important one.”
Likewise, Tekonyx Founder Sid Nag wrote on LinkedIn that Microsoft benefits from its broad reach across enterprise software and cloud infrastructure. But executing on that advantage means aligning infrastructure delivery with when customers use capacity and the economics of that usage.
Google Cloud, meanwhile, is growing rapidly and improving operating profitability, Nag added. The test now is whether that growth can keep Google’s expanding infrastructure well utilized, cover depreciation costs and deliver lasting cash returns, he said.
Microsoft fiscal Q1 2027:
- Microsoft revenue was up 19% year on year to $92.3 billion.
- Goldman Sachs’ Gabriela Borges noted on the call that OpenAI accounted for 11% of Microsoft’s revenue.
- Microsoft’s profit jumped 32% to $36.6 billion.
- Microsoft Cloud revenue (which includes revenue from Azure and several other cloud-based products) was up 30% to $63.9 billion while Azure revenue specifically was up 48%.
- Microsoft’s order backlog jumped 73% to $677 billion, with around 30% of this expected to be recognized in revenue in the next year.
- Capex spending in the quarter was $45.2 billion, a figure expected to rise to $50 billion in FQ2.
- For its full fiscal year, Microsoft expects to drop $170 billion on capex.
Alphabet Q3 2026:
- Alphabet’s revenue rose 25% to $127.6 billion.
- Google Cloud revenue doubled from $15.2 billion to $30.7 billion, with TPU sales now a “meaningful contributor” to revenue.
- Alphabet’s net income available to common stockholders fell from $35 billion to $26.2 billion.
- Alphabet’s order backlog was $561 billion, with around 55% of this expected to be recognized as revenue within the next two years.
- Capex hit $51.4 billion in the quarter, bringing the company’s year-to-date total to $132 billion.
- Alphabet still expects to spend $195-205 billion for the full year 2026, implying $63 billion to $73 billion in Q4 capex.
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