Microsoft Shares Drop After Earnings Report
Microsoft stock slipped nearly 10% after the company released its fiscal Q2 2026 earnings, marking the steepest single‑day decline since 2020.
Revenue beats forecasts but spending spikes
The earnings report showed total revenue of $81.3 billion, a 17% rise from the same period last year and ahead of the consensus estimate of $80.27 billion. Non‑GAAP earnings per share came in at $4.14, surpassing the expected $3.97. Capital expenditures, however, jumped 66% to $37.5 billion as the company expands its AI‑focused infrastructure, including custom silicon and Cobalt chips.
In the Intelligent Cloud segment, revenue climbed 29% to $32.9 billion. Azure and related services grew 39%, driven by demand for AI‑enabled workloads. The growth rate eased slightly from the previous quarter’s 40% pace.
Productivity and Business Processes posted a 16% increase, reaching $34.1 billion. Microsoft 365 Commercial cloud rose 17%, while Consumer cloud revenue surged 29%. Trends 365 added 19% growth, reflecting ongoing AI integration into business tools.
More Personal Computing saw a 3% decline, with revenue at $14.3 billion. Windows OEM sales grew 5%, but Xbox hardware fell 32% amid a softer console market.
Analysts adjust targets amid capacity concerns
Wall Street analysts kept a generally positive stance but trimmed price targets. Morgan Stanley’s Keith Weiss said the market “is not seeing the forest for the trees,” pointing 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 lowered its target to $550 while retaining an outperform rating, noting softness in gaming and search segments and CPU/GPU capacity limits for Azure.
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Goldman Sachs analyst Gabriela Borges reduced the target to $600, citing “higher‑than‑expected capex without a commensurate increase in Azure growth.” KeyBanc’s Jackson Ader echoed the sentiment, saying the short‑term pain is real but the long‑term payoff remains uncertain. Hargreaves Lansdown’s Matt Britzman emphasized that AI demand is outpacing the company’s ability to build capacity.
OpenAI now represents 45% of the firm’s commercial remaining performance obligation, which totals $625 billion. Jefferies analyst Brent Thill warned that the reliance on OpenAI raises questions about whether the AI partner can meet its financial commitments.
The outlook remains cautious.
From a practical standpoint, the heavy spending on AI hardware suggests that enterprises relying on Microsoft’s cloud may see pricing pressure in the short term, even as they benefit from the expanding suite of AI services. Users could experience slower rollout of new features while the company works to scale its custom silicon.
CEO Satya Nadella told investors that the firm is still in the “beginning phases of AI diffusion,” expecting the total addressable market to expand across the tech stack. He highlighted that the AI business already exceeds the size of some of the company’s longest‑standing franchises.
Looking ahead, Microsoft forecast revenue of $80.65 billion to $81.75 billion for the next quarter, implying 15%–17% growth. Azure revenue is expected to rise 37%–38% in constant currency. CFO Amy Hood said cloud gross margins should stay near 65%, as efficiencies from custom silicon and “tokens per watt” optimizations begin to offset high GPU costs.
