You know that expectations for a company are sky high when it can report a 60% year-over-year jump in profits, a 17% rise in revenue, a 45% increase in users of its flagship product, and $12.7 billion returned to shareholders that quarter … and the stock still tanks by 10% the next day. Microsoft (NASDAQ: MSFT) was the victim of this expectations hit last Thursday, as Wall Street digested its Q2 2026 earnings report released the day before. The sell-off wiped away a staggering $357 billion from the tech giant’s market capitalization.
Analysts pointed to slower-than-expected growth in its cloud computing segment, as well as concerns over its plans to ramp up spending on data centers. Are analysts right to be rattled? Or are they overreacting as the company pivots in ways they don’t fully grasp?
Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now, when you join Stock Advisor. See the stocks »
Here’s what the numbers say.
Microsoft Cloud revenue came in at $51.5 billion for the quarter, a 26% rise year over year. This matched the 26% growth in the segment the quarter prior, but analysts took a dim view of growth failing to accelerate.
Microsoft’s $37.5 billion in spending on artificial intelligence (AI) data centers also drew consternation. This 65% jump in AI infrastructure investment from a year ago is testing investors’ patience in the company’s AI vision, even as CEO Satya Nadella says the AI revolution is still in its “early innings.”
Perhaps aware that Wall Street would be leery, CFO Amy Hood explained on the earnings conference call that Microsoft’s cloud business will be able to grow even faster once the company gets past its shortage of AI hardware. Nonetheless, at least four analysts lowered their price targets on Microsoft.
But for all the hand-wringing over rising capital expenditures, it’s notable that operating expenses, or what a company pays for day-to-day business functions (paying employees, research and development, keeping the lights on, etc.), grew by just 5% year over year. That’s far less than the 19% growth in operating income and 15% growth in revenue that the company reported, while its gross margin growth of 14% shows Microsoft is becoming more efficient in producing and managing direct costs.
Microsoft received $7.6 billion last quarter from its partnership with OpenAI, the pioneering company behind ChatGPT. OpenAI committed to buying $250 billion worth of Microsoft Azure compute services to help train its AI models.
