Microsoft’s gross margins decline as Azure growth drives higher infrastructure costs, offsetting peak net margins and cloud revenue gains.
Microsoft’s stock at $499.86 reflects peak net margins of 40%, the highest in five years, but gross margins are falling. The company’s fiscal Q4 2026 gross margin dropped to 67%, driven by a shift toward Azure and AI infrastructure investments, even as operating margins rose to 45%.
Azure revenue surged 43% in Q4 2026, with management expecting growth to accelerate in the first half of fiscal 2027. However, demand outpaces capacity, increasing costs per unit and pressuring profitability. The company’s outlook for fiscal 2027 includes a slight operating margin decline despite projected double-digit revenue and income growth.
Microsoft underperformed the S&P 500 over the past year, returning -4.5% versus the index’s 23% gain. The divergence highlights investor concerns over margin sustainability amid rapid cloud expansion.