Microsoft Stock Takes a Sharp Dive Down
Microsoft’s stock fell nearly 10% on Thursday, marking its worst single-day loss since 2020. The drop followed fiscal second-quarter earnings that missed investor expectations, despite surpassing revenue and profit forecasts.
Revenue grows, but cloud expansion slows
Microsoft posted $81.3 billion in revenue for the quarter, a 17% increase from the previous year and above the $80.27 billion analysts predicted. Non-GAAP earnings per share reached $4.14, beating the $3.97 estimate.
The Intelligent Cloud segment, the company’s largest division, saw revenue climb 29% to $32.9 billion. Azure and other cloud services grew 39%, fueled by demand for AI-enabled infrastructure. The growth rate dipped slightly from the 40% reported in the prior quarter.
Productivity and Business Processes revenue rose 16% to $34.1 billion. Microsoft 365 Commercial cloud revenue increased 17%, while Trends 365 grew 19%, highlighting the steady integration of AI “agents” into business workflows. The More Personal Computing segment declined 3% to $14.3 billion, dragged down by a 32% drop in Xbox hardware sales.
Microsoft reached a key milestone, and its cloud revenues surpassed $50 billion in the December quarter for the first time. CEO Satya Nadella described the milestone as the start of AI’s broad economic impact. “We are in the beginning phases of AI diffusion and its broad GDP impact. Our TAM will grow substantially across every layer of the tech stack as this diffusion accelerates and spreads,” he said during the earnings call.
Capital spending jumps as AI demand outpaces supply
Microsoft’s capital expenditures surged 66% to $37.5 billion. The company rushed to build data centers and develop custom AI chips like Maia and Cobalt. The spending spree squeezed short-term margins, though CFO Amy Hood said 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.
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 (like Copilot) over external customers, Azure’s growth would have remained above 40%.
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This balance between investment and growth isn’t new for tech leaders scaling AI infrastructure. Amazon faced similar scrutiny in 2020 when AWS growth slowed amid heavy spending on data centers and custom chips. The difference now lies in the pace of adoption—AI workloads are growing faster than hardware can support, forcing companies to choose between short-term results and long-term strategy.
OpenAI’s influence on backlog draws attention
Microsoft’s commercial remaining performance obligation reached $625 billion. A disclosure that OpenAI accounted for 45% of that backlog raised concerns. The startup, where Microsoft holds the largest investment, has become a major cloud customer, but its ability to meet financial commitments remains unclear.
Jefferies analyst Brent Thill questioned whether OpenAI could meet its financial goals to pay providers like Microsoft. “The backlog looks strong, but that 45% share makes people wonder,” he said.
Despite the uncertainty, Microsoft forecast revenue of $80.65 billion to $81.75 billion for the next quarter, reflecting 15–17% growth. Azure revenue is expected to rise 37–38% in constant currency, signaling confidence in continued demand.
Analysts at KeyBanc and JPMorgan both reduced their target prices but kept outperform ratings. “Short-term pain is real—we’re seeing it now,” said KeyBanc’s Jackson Ader. “We don’t yet know if the long-term gains will materialize. We’ll have to wait for the investments to pay off.”
As the company handles these challenges, its role in shaping the future of technology remains central.
