Microsoft’s stock experienced its largest single-day decline since 2020 on Thursday, falling nearly 10% following the release of its fiscal Q2 2026 earnings report on Wednesday. The company reported revenues of $81.3 billion, a 17% year-over-year increase, exceeding analyst expectations of $80.27 billion. Non-GAAP earnings per share also surpassed estimates, reaching $4.14 against a predicted $3.97.
The earnings report highlighted substantial investment in artificial intelligence (AI) infrastructure, with capital expenditures surging 66% to $37.5 billion. This investment is focused on building the physical capacity, including custom Maia and Cobalt chips, necessary to meet the growing demand for generative AI services, according to the report.
Intelligent Cloud led growth, with revenue increasing 29% to $32.9 billion. Azure and other cloud services revenue grew 39%, driven by demand for AI-enabled infrastructure and cloud migration. However, this growth rate represents a slight moderation from the 40% reported in the previous quarter.
Productivity and Business Processes revenue rose 16% to $34.1 billion, fueled by a 17% increase in Microsoft 365 Commercial cloud revenue and a 29% surge in Consumer cloud revenue. Dynamics 365 also saw growth, increasing 19% as AI “agents” are integrated into business workflows through platforms like Agent 365.
The More Personal Computing segment experienced a 3% decrease in revenue, totaling $14.3 billion. Windows OEM revenue showed resilience with 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.
Microsoft’s cloud revenues surpassed $50 billion in the December quarter for the first time. CEO Satya Nadella stated that the company is “in the beginning phases of AI diffusion and its broad GDP impact,” anticipating substantial growth in the total addressable market as AI adoption accelerates. He further noted that the company’s AI business is already larger than some of its established franchises that took decades to build.
Looking ahead to the third quarter of fiscal 2026, Microsoft anticipates revenue between $80.65 billion and $81.75 billion, representing a growth rate of 15–17%. Azure revenue is expected to continue growing at approximately 37–38% in constant currency. Microsoft Cloud gross margins are projected to remain around 65%, as efficiency gains from custom silicon and optimizations offset the cost of GPU procurement.
Despite the stock’s decline, Wall Street analysts largely maintained a bullish outlook, though many lowered their target prices. Morgan Stanley’s Keith Weiss suggested the market is focusing on capacity constraints rather than demand, noting that Microsoft could have exceeded 40% Azure growth if it hadn’t prioritized internal AI needs. Evercore’s Kirk Materne echoed this sentiment, stating the issue is “no longer about demand; it is about capacity timing.”
Dan Ives of Wedbush Securities lowered his target price from $625 to $575, but characterized the stock’s weakness as a buying opportunity for long-term investors. JPMorgan also lowered its target price, from $575 to $550, while maintaining an outperform rating, citing a “solid demand picture” despite softness in Gaming and Search segments and CPU/GPU capacity constraints in Azure.
Goldman Sachs lowered its target price from $655 to $600, attributing the stock reaction to higher-than-expected capital expenditures without a commensurate increase in Azure growth. KeyBanc also reduced its target price, from $630 to $600, acknowledging short-term pain but awaiting confirmation of long-term gains. Hargreaves Lansdown’s Matt Britzman expects AI to drive long-term growth, noting that demand is exceeding Microsoft’s ability to build capacity.
Microsoft disclosed a commercial remaining performance obligation (RPO) of $625 billion, with OpenAI accounting for 45% of this backlog. Jefferies analyst Brent Thill, speaking with CNBC, raised concerns about OpenAI’s ability to meet its financial obligations to Microsoft and other providers.
