Microsoft’s Claim to Have Bested OpenAI’s Model at One Fourth The Cost Intrigues Me Enough to Buy
Microsoft says its own AI models can now produce results as good as OpenAI’s models while costing only a fraction as much. This cost difference has changed how one investor views the entire cloud AI market and compares Microsoft with Alphabet and Amazon.
I follow Microsoft (NASDAQ:MSFT | MSFT Price Prediction) closely, and the company’s latest earnings call gave me another reason to keep studying it. Microsoft says its own MAI models now match OpenAI’s results on common tasks at a much lower cost. I am building a retirement portfolio that needs to grow over many decades, so I care more about how these costs change over time than about any other number.
Lower AI Costs Keep Drawing Me Back
Businesses run their AI tools on Microsoft’s platform, and Microsoft keeps lowering the cost of each answer. During the July earnings call, company leaders said MAI Cyber One Flash performed better than a much larger model at half the cost. They also said MAI Voice 2 Flash cut the cost of graphics processing units (GPUs) in Dynamics 365 by 89%. Satya Nadella, who was the company’s chief executive at the time of the call, explained: “We are advancing the frontier on the cost-to-outcome curve, ensuring every customer can turn tokens into business results.” Chief Financial Officer Amy Hood added that “Demand continues to exceed available supply.” When demand is greater than supply, every improvement in efficiency can help increase profit margins.
Three Pieces of Evidence Behind Microsoft’s Growth
First, the company is growing while operating at a large scale. Revenue for fiscal 2026 reached $331.84 billion, an increase of 17.79%. Azure grew by 43% in the fourth quarter and generated more than $100 billion in revenue over the full year. Commercial remaining performance obligations reached $678 billion, up 84%. This figure tracks business that has been agreed to but has not yet been fully counted as revenue. It points to years of future demand already covered by contracts.
Second, Microsoft is profitable. Its operating margin is 46.78%, its net profit margin is 40.31%, and its return on invested capital is 22.01%. Earnings per share (EPS) for the fourth quarter were $4.74, beating the expected $4.24. This was the fifth quarter in a row that earnings beat expectations.
Third, Microsoft has a strong financial position and pays income to shareholders. Its debt-to-equity ratio is 0.29, and its interest coverage ratio is 50.88. Its dividend yield is 0.67%. Microsoft announced another increase in its quarterly dividend in September 2026. In fiscal Q2 alone, it returned $12.7 billion to shareholders.
Why Microsoft Stands Out Against Alphabet and Amazon
Alphabet (NASDAQ:GOOGL) trades at 15 times its earnings, compared with 30 times earnings for Microsoft. Alphabet’s second-quarter net income received a large boost from a $99.03 billion gain on equity investments. This makes its shares look cheaper based on the price-to-earnings ratio than they might otherwise appear. During the same quarter, its free cash flow was negative $5.855 billion, it paused share buybacks, and its long-term debt rose from $46.5 billion to $98.2 billion. Its dividend yield of 0.5% is also lower than Microsoft’s.
Amazon (NASDAQ:AMZN) trades at 36 times earnings and does not pay a dividend. Its shares trade at 367.88 times free cash flow, compared with 59.14 times for Microsoft. Amazon’s free cash flow over the past 12 months is negative $7.6 billion. Its operating margin is 11.16%.
A Risk I Will Not Ignore
The biggest risk to Microsoft’s future is how much it spends on new equipment and other assets. Capital spending in fiscal 2026 rose 79.62% to $115.95 billion. Fourth-quarter free cash flow fell 23.19% to $19.64 billion, and company leaders expect capital spending of about $175 billion. Microsoft also depends heavily on OpenAI, which concerns me. Without OpenAI, growth in commercial remaining performance obligations was only 25%.
Several other figures help balance these risks. Cash flow from operations rose 34.35% to $182.94 billion. Nearly 90% of Microsoft Cloud revenue came from customers outside companies developing the most advanced AI models. Hood also said that capital spending had shifted toward “short-lived assets.” This means that “if the demand environment changes, you just slow down” the biggest cost driver.
Growth Opportunities Investors Should Not Miss
Microsoft 365 Copilot now has more than 30 million paid seats, and the number of new seats added each quarter more than doubled from the previous quarter. Foundry has 100,000 customers, and Microsoft expects to roughly double its capacity within two years. All that capacity needs power, cooling, and network connections. We highlighted seven companies that provide these services in a free AI infrastructure report. Microsoft’s stock rose 907.07% over the past ten years. Each cheaper AI model increases the difference between what Microsoft charges customers and what it costs the company to provide the service. That difference is the key number to watch.
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Alex Sirois is a financial writer with experience in both personal and institutional investing. He has written for InvestorPlace and worked at BNY Mellon and Bernstein. These experiences give him insight into both everyday investors and Wall Street professionals.
Alex has an MBA from George Washington University. He has worked in several industries, including online shopping, education, and translation. This wide range of experience helps him explain complex financial topics in ways that everyday investors can understand. His writing is conversational, practical, and based on long-term investing and holding investments over time.
At 247 Wall St., Alex focuses on providing analysis that is easy to understand and useful, helping readers make better decisions about their money.