Microsoft shares plunge nearly 10% after earnings
Microsoft’s shares tumbled almost 10% on Wednesday after the company posted its fiscal Q2 2026 earnings, marking the steepest single-day decline since 2020.
Revenue beats estimates but costs climb
The tech giant reported $81.3 billion in revenue, a 17% year-over-year rise that topped the consensus forecast of $80.27 billion. Non-GAAP earnings per share came in at $4.14, exceeding analysts’ expectation of $3.97.
Capital spending surged 66% to $37.5 billion, driven by a push to expand artificial intelligence infrastructure, including custom Maia and Cobalt chips designed for generative AI workloads.
Microsoft’s Intelligent Cloud segment remained the primary growth engine, delivering $32.9 billion in revenue, up 29% from a year earlier. Azure and related cloud services grew 39%, though the pace slipped slightly from the 40% growth recorded in the prior quarter.
Productivity and Business Processes generated $34.1 billion, a 16% increase, helped by a 17% rise in Microsoft 365 Commercial cloud and a 29% jump in Consumer cloud revenue. Trends 365 also rose 19%, reflecting deeper AI integration through platforms such as Agent 365.
More Personal Computing saw revenue dip 3% to $14.3 billion. Windows OEM sales grew 5%, buoyed by the pending end-of-support for Windows 10, while Xbox hardware sales collapsed 32% as the global console market cooled.
Analysts trim price targets amid capacity concerns
Despite the stock slide, most analysts kept a bullish stance but lowered price targets. Morgan Stanley’s Keith Weiss warned that the market is not seeing the forest for the trees, attributing the slowdown to hardware constraints rather than demand weakness.
Evercore’s Kirk Materne added that the debate is no longer about demand; it is about capacity timing. Wedbush’s Dan Ives cut his target from $625 to $575, calling the share-price dip a buying opportunity for long-term investors.
JPMorgan reduced its target to $550, maintaining an outperform rating, while Goldman Sachs’s Gabriela Borges lowered the target to $600 but kept a buy rating, citing higher-than-expected capital spending without a commensurate increase in Azure growth.
For developers relying on Azure, the current capacity constraints mean they may face higher costs or delayed project timelines, even as demand for AI services climbs.
Microsoft disclosed a commercial remaining performance obligation (RPO) of $625 billion, with OpenAI accounting for 45% of that backlog. The company is OpenAI’s largest investor, linking its fortunes closely to the AI startup’s ability to meet financial commitments.
Jefferies analyst Brent Thill told CNBC that the backlog is really good, but the disclosure that OpenAI is 45% of their backlog raises questions about whether OpenAI can achieve these financial goals to pay Oracle, Microsoft, and many of the providers.
AI ambition and market positioning
During the earnings call, Satya Nadella described AI diffusion as the beginning phases, with a broad GDP impact and a rapidly expanding total addressable market.
He added that the AI business now exceeds the size of several historic Microsoft franchises that required decades to build.
In addition, Microsoft reported that its cloud revenues surpassed $50 billion for the first time in the December quarter. This milestone marks the importance of cloud services as the core engine of overall revenue generation.
Outlook and margin expectations
Looking ahead, Microsoft projected third-quarter revenue between $80.65 billion and $81.75 billion, indicating a 15-17% year-over-year increase.
Azure revenue is expected to grow at a constant-currency rate of roughly 37-38% during the same period.
CFO Amy Hood said cloud gross margins should hover near 65%, helped by efficiency gains from custom silicon. She also referenced “tokens per watt” optimizations as a factor that will offset higher GPU procurement costs.
