Microsoft: capital intensity is rising, and owners should price it in
Capital expenditure on data centres is approaching a third of revenue. The returns look adequate, not spectacular.
Daniel MoreauUS Equities AnalystCompleted 9 Oct 2026, 21:00 CEST · First published 10 Oct 2026, 15:00 CEST
6 min read
Microsoft is no longer a capital-light software company. Capital expenditure, largely on data centres and accelerated computing, has risen to roughly 30% of revenue from about 12% five years ago.
Returns on the build-out
Azure revenue growth of 33% in the latest quarter suggests demand is real. Our estimate of incremental return on invested capital on the new infrastructure is around 14%, comfortably above the cost of capital, but well below the returns the legacy software franchise earned.
Valuation
We value Microsoft at $470 per share, using a 7.5% discount rate and assuming capital intensity peaks in fiscal 2027. At current prices, that implies modest upside.
Rating
We upgrade the shares to Buy from Hold. The franchise remains among the strongest in the market, and the recent pull-back offers a reasonable entry point for long-term owners.
Disclosure
Long position — covering the author and persons closely associated with them.
The author holds a long position in Microsoft.
Other relationships: None.
This article is general information and the author's opinion. It is not investment advice and does not take into account your personal circumstances. Past performance is no guide to future returns. See our disclaimer.
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