Microsoft’s stock plunged nearly 10% Wednesday—its biggest single-day drop since 2020—despite reporting better-than-expected revenue and earnings for its fiscal second quarter. The market reaction centers on concerns about the pace of growth in the company’s cloud business, even as it invests heavily in artificial intelligence.
Microsoft’s Q2 Earnings: AI Spending Weighs on Stock
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Despite strong overall results, investor focus is on the cost of AI infrastructure.
- Microsoft reported $81.3 billion in revenue, a 17% year-over-year increase.
- Earnings per share reached $4.14, exceeding analyst estimates of $3.97.
- Capital expenditures surged 66% to $37.5 billion, driven by AI infrastructure build-out.
- Cloud revenue surpassed $50 billion for the first time.
Microsoft’s fiscal Q2 2026 results, released after markets closed Wednesday, revealed a company firing on most cylinders, but facing scrutiny over its massive investments in AI. The tech giant’s revenue reached $81.3 billion, surpassing the consensus estimate of $80.27 billion. Non-GAAP earnings per share came in at $4.14, also beating expectations at $3.97.
Segment Performance: Cloud Leads the Way
Here’s a breakdown of how Microsoft’s key business segments performed during the quarter:
- Intelligent Cloud: Revenue rose 29% to $32.9 billion, fueled by a 39% increase in Azure and other cloud services. While growth moderated slightly from the previous quarter’s 40%, demand for AI-enabled infrastructure remains robust.
- Productivity and Business Processes: Revenue increased 16% to $34.1 billion, driven by a 17% rise in Microsoft 365 Commercial cloud and a 29% surge in Consumer cloud revenue. Dynamics 365 also grew 19%, showcasing the integration of AI agents into business workflows.
- More Personal Computing: This segment experienced a 3% decline to $14.3 billion. Windows OEM revenue showed resilience with 5% growth, but a 32% drop in Xbox hardware sales weighed on overall results, reflecting a cooling global console market.
Cloud Revenues Break $50 Billion Mark
Microsoft’s cloud business continues to be a major growth driver, surpassing $50 billion in revenue for the first time during the December quarter. CEO Satya Nadella emphasized the long-term potential of AI, stating, “We are in the beginning phases of AI diffusion and its broad GDP impact. Our TAM will grow substantially across every layer of the tech stack as this diffusion accelerates and spreads. In fact, even in this early innings, we have built an AI business that is larger than some of our biggest franchises that took decades to build.”
Confident Outlook for Fiscal Q3
Looking ahead to the third quarter of fiscal 2026, Microsoft anticipates revenue between $80.65 billion and $81.75 billion, representing a growth rate of 15–17%. Azure revenue is expected to continue growing strongly, at approximately 37–38% in constant currency.
While significant capital spending is expected to continue impacting short-term margins, CFO Amy Hood indicated that Microsoft Cloud gross margins should remain around 65%, as efficiency gains from custom silicon and “tokens per watt” optimizations offset the high cost of procuring GPUs.
Analysts Weigh In
Despite the stock’s decline, Wall Street analysts largely remain optimistic about Microsoft’s long-term prospects. Morgan Stanley’s Keith Weiss argued that the market is overlooking the bigger picture, noting that the current slowdown isn’t due to a lack of demand, but rather a constraint in hardware availability. CFO Amy Hood revealed that prioritizing internal AI needs (like Copilot) over external Azure customers impacted Azure’s growth rate.
Evercore’s Kirk Materne added, “The debate is no longer about demand; it is about capacity timing.”
Dan Ives of Wedbush Securities lowered his target price from $625 to $575, stating, “The company is capitalizing on the heightened momentum seen in the AI Revolution… weakness in the share price represents strong buying opportunities for long-term investors.”
JPMorgan also reduced its target price from $575 to $550 while maintaining an outperform rating. Analyst Mark Murphy noted a “solid demand picture” despite softness in gaming and search segments, and CPU/GPU capacity constraints in Azure.
Goldman Sachs and KeyBanc Adjust Targets
Gabriela Borges of Goldman Sachs lowered Microsoft’s target price from $655 to $600, maintaining a buy rating. She believes the stock reaction reflects higher-than-expected capital expenditures without a corresponding increase in Azure growth, suggesting short-term trade-offs for long-term AI positioning.
KeyBanc also lowered its target price from $630 to $600, with analyst Jackson Ader acknowledging the “short-term pain” but questioning whether the long-term gains will materialize.
Matt Britzman of Hargreaves Lansdown also anticipates AI to drive long-term growth for Microsoft, stating, “Demand for AI is so strong that Microsoft can’t build capacity fast enough. AI services are delivering a big, and growing, chunk of Azure’s growth… that’s a trend we expect to continue.”
OpenAI’s Role in Microsoft’s Backlog
Microsoft disclosed a commercial remaining performance obligation (RPO) of $625 billion, with OpenAI accounting for a significant 45% of that backlog. Given that Microsoft is OpenAI’s largest investor, the two companies’ fortunes are closely intertwined.
Jefferies analyst Brent Thill commented, “The backlog is really good, but the disclosure that OpenAI is 45% of their backlog… goes back to the situation where, Can OpenAI achieve these financial goals to pay Oracle, Microsoft and many of the providers?”
