TLDR
- Microsoft stock dropped 22% from peak to $393.58 following fiscal Q2 2026 earnings disappointment on January 28
- Enterprise Copilot adoption stalled at 15 million licenses representing only 3.7% of 400 million Microsoft 365 business users
- Azure cloud platform growth decelerated to 39% from 40% despite exceeding Wall Street’s 37.1% estimate
- Company faces major risk with 45% of $625 billion backlog concentrated in OpenAI at $281 billion
- Valuation compressed to P/E of 26.5, lowest in three years versus Nasdaq-100’s 32.8 ratio
Microsoft shares have crashed 22% from all-time highs after the company reported fiscal Q2 2026 results. The stock lost more than 10% on January 28 as investors digested weak AI metrics.
Trading at $393.58 as of February 5, the stock sits far below its $555 peak. The selloff came despite solid overall performance including 16.7% trailing twelve-month revenue growth.
Wall Street zeroed in on trouble spots within Microsoft’s AI portfolio. Both Copilot and Azure showed signs of slowing momentum that rattled confidence.
Copilot Fails to Win Over Enterprises
Microsoft’s Copilot AI assistant has reached only 15 million business users. With 400 million Microsoft 365 enterprise licenses in the market, that translates to 3.7% penetration.
The adoption rate doubled year-over-year but came in well below expectations. Copilot works inside familiar tools like Word, Excel and Outlook to automate tasks.
Some segments performed better. Developer-focused Copilot subscriptions jumped 77% quarter-over-quarter among individual coders.
Dragon Copilot for healthcare reached 100,000 medical professionals. The tool documented 21 million patient encounters in Q2, up three times from last year.
Azure Decelerates Despite Strong Numbers
Azure posted 39% year-over-year revenue growth in the second quarter. The cloud platform beat analyst forecasts calling for 37.1% expansion.
But investors noticed Azure grew 40% just one quarter earlier. The one percentage point deceleration sparked worries about future trajectory.
Data center capacity constraints held back faster growth according to management. Customer orders waiting for infrastructure surged 110% year-over-year to $625 billion.
That massive backlog hides a critical weakness. OpenAI alone represents $281 billion or 45% of total future commitments disclosed by the CFO during earnings.
The startup doesn’t have cash on hand to fulfill those orders. OpenAI needs continued investor funding and rapid revenue scaling to honor commitments.
Shareholder lawsuits filed in February 2026 claim Microsoft misled investors about the extent of OpenAI dependency. The concentration creates execution risk if the partnership falters.
Capital expenditures hit $37.5 billion in Q2 2026 as Microsoft builds AI infrastructure. Gross margins declined company-wide despite revenue gains, squeezing profitability.
Legacy businesses also struggled. The More Personal Computing segment fell 3% year-over-year while gaming revenue dropped 9%.
Xbox content and services declined 5% in the period. The weakness in traditional segments offset some AI gains.
Microsoft now trades at a price-to-earnings ratio of 26.5 based on $15.98 in trailing earnings per share. That marks the lowest valuation in three years.
The broader Nasdaq-100 index trades at 32.8 times earnings, making Microsoft relatively cheap. Analysts forecast fiscal 2027 earnings of $19.06 per share, putting the forward P/E at 22.4.
The company generates strong cash flows with 25.3% free cash flow margin and 46.7% operating margin. Microsoft maintains a $2.9 trillion market capitalization despite the recent decline.
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