Microsoft Stock Falls on Disappointing Earnings Report
Microsoft (NYSE: MSFT) shares fell almost 10% on Wednesday, marking the company’s largest single-day drop since 2020, following the release of its fiscal Q2 2026 earnings report.
Financial Results
Revenue for the quarter reached $81.3 billion, a 17% increase year-over-year, slightly above consensus estimates of $80.27 billion. Non-GAAP earnings per share came in at $4.14, beating analyst expectations of $3.97. The filing notes that capital expenditures surged 66% to $37.5 billion, reflecting massive spending on artificial intelligence infrastructure and custom chips like Maia and Cobalt.
Intelligent Cloud remained the primary growth engine, with revenue rising 29% to $32.9 billion. Azure and other cloud services grew by 39%, driven by demand for AI-enabled infrastructure and customer migration to the cloud for large-scale model training. Productivity and Business Processes revenue increased 16% to $34.1 billion, fueled by Microsoft 365 Commercial cloud (up 17%) and a 29% surge in Consumer cloud revenue. Trends 365 grew 19%, showing steady integration of AI agents into workflows. More Personal Computing saw a slight contraction, with revenue decreasing 3% to $14.3 billion. While Windows OEM revenue showed resilience with 5% growth, the segment was weighed down by a 32% drop in Xbox hardware sales.
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Microsoft Cloud revenues surpassed $50 billion in the December quarter for the first time. CEO Satya Nadella stated during the earnings call that the company is in the early phases of AI diffusion and that its total addressable market will grow substantially across every layer of the tech stack. He added that even in this early stage, Microsoft has built an AI business larger than some of its biggest franchises that took decades to develop.
Guidance and Outlook
For the third quarter of fiscal 2026, Microsoft expects revenue between $80.65 billion and $81.75 billion, representing a growth rate of 15–17%. The company anticipates Azure revenue growth to remain strong at approximately 37–38% in constant currency. CFO Amy Hood indicated that Microsoft Cloud gross margins should hover around 65%, as efficiency gains from custom silicon and “tokens per watt” optimizations begin to offset the high cost of GPU procurement.
Wall Street analysts maintained their bullish opinion even as they lowered their target prices. Morgan Stanley’s Keith Weiss noted that the market is “not seeing the forest for the trees.” The perceived slowdown isn’t due to a lack of customers; it’s a lack of hardware. CFO Amy Hood revealed that if Microsoft hadn’t prioritized internal AI needs over external Azure customers, the growth KPI would have exceeded 40%. Kirk Materne of Evercore added that the debate is no longer about demand; it is about capacity timing.
JPMorgan analyst Mark Murphy said Microsoft showed a “solid demand picture” in its quarterly results, though he noted underlying drivers include softness in less-critical segments and capacity constraints in Azure.
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Goldman Sachs lowered its target price from $655 to $600 while maintaining its buy rating, suggesting the stock reaction reflects higher-than-expected capital expenditures without a commensurate increase in Azure growth.
Microsoft disclosed that its commercial remaining performance obligation stood at $625 billion.
The company is investing heavily in custom silicon and “tokens per watt” optimizations to offset the high cost of GPU procurement.
