Microsoft stock plunges after earnings report

Microsoft (NYSE: MSFT) shares plunged nearly 10% on Thursday, their largest single-day drop since 2020, following the release of its fiscal second-quarter 2026 earnings report. The company reported quarterly revenue of $81.3 billion, a 17% year-over-year increase that beat analyst consensus estimates of $80.27 billion. Non-GAAP earnings per share came in at $4.14, also exceeding the $3.97 forecast.

Heavy AI Investments Drive Spending

The stock slide came despite the top and bottom line beats. Analysts pointed to Microsoft’s massive capital expenditures as a key concern. The company’s capex surged 66% to $37.5 billion as it builds out physical capacity for its artificial intelligence services. This investment includes custom Maia and Cobalt chips designed to meet the high demand for generative AI.

Microsoft’s cloud business, the primary growth engine, showed strong but moderating growth. Revenue for the Intelligent Cloud segment rose 29% to $32.9 billion. Azure and other cloud services revenue grew by 39%, fueled by AI-enabled infrastructure and customer migration to support large-scale model training. This growth rate was slightly down from 40% in the previous quarter.

Segment Performance and Cloud Milestone

The company’s Productivity and Business Processes segment saw a 16% revenue increase to $34.1 billion. This growth was driven by a 17% rise in Microsoft 365 Commercial cloud revenue and a notable 29% surge in Consumer cloud revenue. Trends 365 grew 19%, highlighting the integration of AI agents into business workflows.

The More Personal Computing segment saw a slight contraction, with revenue falling 3% to $14.3 billion. Windows OEM revenue showed 5% growth, aided by the approaching end-of-support for Windows 10. However, this was offset by a 32% drop in Xbox hardware sales, reflecting a cooling global console market.

Despite the stock dip, Microsoft reached a significant milestone in the quarter: its total cloud revenues surpassed $50 billion for the first time. CEO Satya Nadella expressed confidence in the long-term AI opportunity, stating during the earnings call, “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.”

The company provided upbeat guidance for the third quarter of fiscal 2026, projecting revenue between $80.65 billion and $81.75 billion, representing a 15–17% growth rate. Azure revenue growth is expected to remain strong at approximately 37–38% in constant currency. CFO Amy Hood noted that while heavy spending will pressure short-term margins, Microsoft Cloud gross margins should hover around 65% as efficiency gains from custom silicon begin to offset high GPU costs.

Wall Street analysts largely maintained a bullish stance on Microsoft, even as many lowered their target prices. Morgan Stanley’s Keith Weiss argued the market is “not seeing the forest for the trees,” suggesting the perceived slowdown is due to a lack of hardware, not a lack of customers. CFO Amy Hood revealed that if Microsoft hadn’t prioritized internal AI needs like Copilot, Azure’s growth would have exceeded 40%.

Analyst Kirk Materne of Evercore added, “The debate is no longer about demand; it is about capacity timing.” Dan Ives of Wedbush Securities, who lowered his target price from $625 to $575, said the share price weakness represents “strong buying opportunities for long-term investors.”

Analyst Views on Microsoft’s AI Strategy

Microsoft’s commercial remaining performance obligation (RPO) stood at a substantial $625 billion. However, a significant portion of this backlog is tied to its largest investment, OpenAI. OpenAI accounts for 45% of Microsoft’s cloud backlog, raising questions about the AI startup’s ability to meet its financial commitments and pay its providers. Jefferies analyst Brent Thill highlighted this dependency as a key factor for investors to monitor.

Market Sentiment and Future Outlook

Despite the short-term volatility and the heavy capex, many analysts maintained a bullish outlook on Microsoft. They believe the company is making the right investments to dominate the AI market for years to come. The sentiment is that the current stock slide presents a buying opportunity for long-term investors who are confident in Microsoft’s ability to capitalize on the AI revolution.