Microsoft Corporation (NASDAQ: MSFT) delivered a classic “beat and drop” performance this week, posting better‑than‑expected fiscal second‑quarter results only to see its stock plunge as much as 10% in Thursday trading. The sell‑off highlights a growing tension on Wall Street: investors are willing to tolerate massive artificial‑intelligence spending—but only if it translates into accelerating revenue growth. For Microsoft, Azure cloud growth is slowing just as capital expenditures are soaring, raising hard questions about the return on the company’s historic AI investments.
How Microsoft’s Earnings Beat Turned into a Stock Rout
On the surface, Microsoft’s Q2 FY26 numbers were impressive. The company reported adjusted earnings per share of $4.14, topping the $3.97 consensus, while revenue reached $81.27 billion versus expectations of $80.3 billion. Cloud revenue crossed the $50 billion threshold for the first time, and the company returned $12.7 billion to shareholders through dividends and buybacks, a 32% year‑over‑year increase. Yet within hours of the report, Microsoft shares were down sharply, erasing about $358 billion in market capitalization in a single session—the second‑largest one‑day value destruction ever, behind only Nvidia’s $593 billion wipeout in January 2025.
Timeline: The 24 Hours That Shook Microsoft Investors
The sequence of events moved rapidly. Microsoft released its earnings after the close on Wednesday, January 28, 2026. Within minutes, the stock was down 5% in after‑hours trading. By Thursday morning, the decline had deepened to 10.1%, putting the shares on track for their worst post‑earnings drop since July 2013. Analysts scrambled to digest the details: Azure and other cloud services revenue grew 38% in constant currency, exactly matching Wall Street’s forecast but down from 40% growth in the prior quarter. Meanwhile, capital expenditures—driven largely by purchases of AI‑critical GPUs and data‑center build‑out—jumped 66% year over year to $37.5 billion. On the earnings call, CFO Amy Hood acknowledged that Azure could be growing faster if Microsoft shifted more of its limited GPU capacity to external customers, but that would come at the expense of internal developers building the next generation of Microsoft services.
Why Investors Are Worried: The AI Spending vs. Growth Equation
“One of the core issues that is weighing on investors is capex is growing faster than we expected, and maybe Azure is growing a little bit slower than we expected,” Morgan Stanley’s head of U.S. software research, Keith Weiss, told Microsoft management on the call. “That fundamentally comes down to a concern on the ROI on this capex spend over time.” The concern is not unique to Microsoft; earlier this quarter, Meta Platforms faced similar skepticism before convincing investors that its AI investments were paying off. But Microsoft’s position is different: it monetizes AI spending directly through its Azure cloud business, so any slowdown in Azure growth is seen as a direct hit to the payoff from its enormous capex.
Adding to the complexity, Microsoft’s demand backlog—essentially future revenue already under contract—more than doubled to $625 billion, largely because of a $250 billion commitment from OpenAI. That staggering number signals strong long‑term demand, but it also highlights the capacity crunch the company faces. With GPU supplies tight, Microsoft must choose between satisfying external Azure customers and fueling its own internal AI projects. “We’re really making long‑term decisions,” Hood said, emphasizing that the company is “investing in the long‑term nature of R&D and product innovation.”
Where Microsoft Stands Now: The Numbers Behind the Story
Beyond the quarterly noise, Microsoft’ underlying financials remain robust. The company’s annual report for fiscal 2025, released a few weeks ago, showed record revenue of $281.7 billion (up 15%), operating income of $128.5 billion (up 17%), and Azure revenue surpassing $75 billion for the first time (up 34%). For the current quarter, Microsoft guided for Azure growth of 37% to 38% on a constant‑currency basis, essentially in line with analyst expectations. The company also continues to shower shareholders with cash, having returned more than $350 billion to investors over the past decade through dividends and buybacks.
What Happens Next: The Road Ahead for Microsoft Stock
The immediate question is whether Microsoft can accelerate Azure growth while managing its capex budget. Analysts are watching for signs that GPU supply constraints ease, which would allow the company to meet more of the backlog demand. Longer term, the bet is that today’s AI investments will fuel a new wave of productivity‑enhancing services that drive growth across Microsoft’s entire portfolio. Wall Street’s price targets reflect that optimism: the average 12‑month target sits around $612‑$619, implying upside of roughly 28% from current levels. The highest target reaches $730, while the most cautious is $450.
The Bottom Line: Key Takeaways for Investors
- Earnings beat, stock fell: Microsoft topped Q2 expectations but shares dropped 7‑10% on concerns over slowing Azure growth and soaring AI capex.
- Cloud growth decelerating: Azure revenue grew 38% constant currency, down from 40% in Q1 and barely ahead of estimates.
- Capex surge: Capital expenditures jumped 66% to $37.5 billion as Microsoft races to build AI infrastructure.
- Backlog ballooned: Future revenue commitments more than doubled to $625 billion, driven largely by OpenAI.
- Long‑term bet: Management insists current spending is necessary to secure Microsoft’s position in the AI era, but investors want faster proof of ROI.
- Analysts remain bullish: Average price target suggests 28% upside, though near‑term volatility is likely until the growth‑vs‑spending balance improves.
For now, Microsoft finds itself in the investor doghouse—a place familiar to other tech giants that have poured billions into AI before showing clear returns. The company’s challenge is to convince the market that today’s heavy spending will unlock tomorrow’s growth, not just weigh on margins. With Azure still growing at a stellar clip and a $625 billion backlog in hand, the pieces are there; the next few quarters will determine whether investors believe the puzzle is coming together.
