Comedy or Tragedy? ⭐

Every quarter, I write an analysis piece about Microsoft's earnings, and the focus has largely been on AI for obvious reasons in recent years. But as the AI infrastructure spending continues rising sharply, I keep waiting for some sign that we've finally hit peak spending or that the business will miraculously start making sense because customer spending rises to match.

Neither has happened, and I'm positive the latter is impossible. This reminds me of the 1998 Saturday Night Live skit Change Bank in which representatives of that fictitious bank explain how its business model, which involves making change for large bills without charging fees, makes sense. "Our customers ask us, 'How do you make money doing this?'," one representative says. "The answer is simple. Volume."

This seems to be the accounting principle that Microsoft employs with AI. Which, unlike the SNL skit, isn't funny at all. The underlying impetus appears to be more about dramatically outspending any potential newcomers to this market to ensure that when the dust settles, Microsoft will remain standing, and dominant, alongside Amazon and Google, with their traditional positions in place. In short, this is a familiar and well-worn strategy for any dominant company, and it's only the scale that makes it so fascinating.

When I wrote my most recent analysis of Microsoft's quarterly earnings, the only obvious takeaway given the information Microsoft had provided was that it had found a new accounting trick to obscure the true level of its spending: In addition to paying for hardware components like chips and servers over double the period of time that it had done before, Microsoft is now extending the useful lives of its datacenters and office buildings from 15 to 25 years. And it is shifting that spending away from the capital expenditures (CAPEX) category that's used to account for AI infrastructure spending and moving it into an operational leases category. As with the previous change, it is doing this to make its spending--which will rise from $40 billion in the reported quarter to $50 billion in the current quarter--look smaller. That is, it will report the $50 billion number, but the real spending is much higher, perhaps $60 billion or more.

Microsoft does this for the same reason any company highlights the positives and downplays the negatives in its financial reports: This is a marketing exercise with the highest imaginable stakes, and its stock price and market capitalization (market cap), and thus its market power, rely on a favorable reception with Wall Street. The analysts who should be protecting our retirement funds and the nation's economy are more interested in excitement and good news than they are in being responsible. And Microsoft is only too happy to provide the happy noises they expect. In an era of historic overspending with no return on investment in sight, these changes will help in that regard.

Reporting on Microsoft's business has only become...