AI Hardware Cools Off，Here’s Why

AI hardware has continued to cool down in the capital markets. Following the after-hours earnings reports released by Microsoft and Meta on July 29, 2026, the most direct cause has finally come to light.

Revenue Continues Strong Growth, Profits Diverge

Let us first examine the performance of the two companies.

• Microsoft: Microsoft's fourth fiscal quarter (ending in June) total revenue reached $90.0 billion, a year-on-year increase of 18%, with net income at $35.77 billion, up 31% year-on-year. One-time gains included a $3.2 billion paper profit from the Anthropic investment and lower-than-expected voluntary retirement costs, partially offset by Xbox impairment charges.
  • As the core growth engine, Microsoft Cloud revenue reached $59.3 billion, a 27% year-on-year increase. The high-profile Azure and other cloud services business achieved massive scale with a growth rate as high as 43%, with AI contributions being significant. FY2026 full-year Azure annualized revenue crossed $100 billion for the first time, growing by 33%.
  • Regarding earnings guidance, Microsoft expects robust cloud demand to continue in the first quarter of fiscal 2027 (ending in September), with projected revenue between $89.85–$90.95 billion and Azure business growth at approximately 45%.
  • Notably, Microsoft management stated that high infrastructure depreciation costs are beginning to exert structural pressure on profit margins.
• Meta: Second-quarter revenue recorded $60.8 billion, an increase of about 28% year-on-year, slightly above market expectations. However, its costs and expenses remained stubbornly high primarily due to total quarterly expenses surging 55% to $420 billion, which included $2.4 billion in legal litigation costs, $1.2 billion in employee layoffs and restructuring compensation, as well as rigid infrastructure costs such as surging server depreciation and AI R&D talent compensation required to sustain AI large model training and computing power expansion.
  • Multiple negative factors led to a 14% year-on-year decline in net income, triggering market concerns regarding earnings quality.
  • Regarding earnings guidance, Meta expects total revenue for the third quarter of 2026 to be between $61.0 billion and $64.0 billion.

Capital Expenditures: Not "Hard" Enough

Naturally, the most watched focus of this earnings release undoubtedly fell on Capital Expenditures (CapEx)—especially regarding attitudes toward CapEx after a sharp rise in storage prices.

Microsoft's total capital expenditures including finance leases for the quarter reached $41.0 billion, a year-on-year increase of 69%, representing a 28.5% sequential increase compared to $31.9 billion in the previous quarter.

It is worth noting that Microsoft's expected CapEx figure for fiscal 2027 is $175 billion, compared to the previously expected $190 billion. Management stated that the reduction in capital expenditures is simply due to a change in financial accounting treatment: money previously counted as "purchasing assets" is now partly reclassified as "long-term rent," meaning cash outlays for the year shown on the books are lower.

By contrast, Alphabet just raised its full-year CapEx expectation to a staggering $205 billion last week. Due to massive spending on AI servers and data center construction, Alphabet experienced negative cash flow for the first time.

Meta's Q2 CapEx was approximately $31.1 billion (up 83% year-on-year). However, its full-year CapEx guidance was merely narrowed from $125–$145 billion to $130–$145 billion, without upwardly revising capital expenditures despite sharp price increases in server components represented by storage.

It is worth mentioning that unlike Microsoft, Meta has no external cloud business to hedge against, and its AI infrastructure relies entirely on advertising cash flow to carry the burden.

Morgan Stanley previously released an industry estimation report forecasting CapEx for major overseas cloud vendors: the entire industry's CapEx in 2026 will achieve a high year-on-year growth rate of 83%, and even by 2027, the overall industry growth rate will still be able to maintain a high level of 58%.

However, looking back at the latest financial reports disclosed yesterday by Microsoft and Meta, the capital expenditure guidance and data baselines released by the two giants are overall conservative and weaker than the market's previous optimistic expectations. Coupled with the continuous upward trend in prices of upstream core components for AI servers, this has further amplified the cost pressure of cloud vendors' computing power investments.

If the capital expenditure growth rate of global hyperscale cloud vendors falls back to the low double-digit range in 2027, the core growth logic currently supporting the high valuations of the AI hardware sector may loosen significantly, and the entire computing hardware supply chain could face a comprehensive valuation repricing.