TLDR
- Microsoft stock dropped 10% last Thursday following Q2 earnings, marking its worst one-day decline since March 2020
- The company spent $37.5 billion on data centers in Q2, a 66% year-over-year increase that spooked investors
- Azure cloud revenue grew 38% but missed Wall Street’s expectations for stronger returns on AI investments
- Morgan Stanley maintains a buy rating with a $650 price target, suggesting 51% upside potential
- Microsoft beat revenue and earnings estimates but slower Azure growth raised concerns about AI spending payoff
Microsoft shares took their biggest hit since the pandemic started when the stock crashed 10% last Thursday. The drop came after the tech giant reported second-quarter earnings that left investors questioning whether massive AI spending is paying off.
The company posted revenue of $81.3 billion for the quarter ending December 31, 2025. That’s a 17% jump from last year and beat analyst expectations by over $1 billion. Earnings per share hit $4.14, topping forecasts by $0.22.
So why did the stock tank? Investors zeroed in on two numbers that didn’t match the hype. Capital expenditures jumped 66% to $37.5 billion as Microsoft poured money into data centers. At the same time, Azure cloud revenue grew 38% – barely meeting expectations and slowing from the previous quarter.
Wall Street wanted more bang for all those bucks. The market reaction shows just how impatient investors have become with AI investments. Everyone’s hunting for proof that billions in spending will turn into actual profits.
Morgan Stanley analyst Keith Weiss sees things differently. He calls Microsoft’s quarter “remarkably strong” when you look at the bigger picture. Revenue growth of nearly 17% is nothing to sneeze at for a company this size.
Strong Bookings Tell a Different Story
Weiss points to commercial bookings that exploded 228% in constant currency compared to last year. While part of that came from a major OpenAI deal, the company also locked in solid growth across its core business. Microsoft added the Anthropic partnership too.
Commercial remaining performance obligations hit $625 billion, up 110% year over year. Strip out OpenAI and you still have over $340 billion tied to other customers – a segment that grew 28%. These bookings represent future revenue stretching out about 2.5 years.
The Azure outlook isn’t as grim as the market suggests either. Management guided for 37% to 38% growth next quarter. That’s roughly flat compared to the 38% just reported, but the comparison gets tougher. If Microsoft delivers even a small beat around 39%, Azure growth could actually accelerate despite facing harder year-over-year comps.
Operating expenses are set to grow 10.5% at the midpoint of guidance. That’s a faster pace than recent quarters and signals higher costs ahead. It’s another factor Weiss says investors should watch closely.
Wall Street Still Backs the Stock
The selloff created what Weiss calls an attractive entry point. He maintains an overweight rating with a $650 price target. That suggests 51% upside from current levels.
Most analysts agree. Out of 35 covering the stock, 34 rate it a buy with only one hold. The average price target sits at $603.47, implying 42% gains over the next year.
The contrast with Meta Platforms highlights how much expectations matter in this market. Meta’s stock jumped 10% the same day Microsoft crashed. Meta raised its current quarter revenue guidance above analyst estimates while Microsoft’s Azure numbers came up short.
Microsoft still beat on both revenue and earnings. The company grew operating income 21% to $38.3 billion. But in the AI gold rush, beating estimates isn’t enough anymore. Investors want proof that record spending on data centers will deliver outsized returns.
The company’s weighted-average contract duration of 2.5 years on that $625 billion in remaining performance obligations provides visibility into future revenue streams through 2027.
Get 3 Free Stock Ebooks
Discover top-performing stocks in AI, Crypto, and Technology with expert analysis.
- Top 10 AI Stocks - Leading AI companies
- Top 10 Crypto Stocks - Blockchain leaders
- Top 10 Tech Stocks - Tech giants
