Microsoft Q2 FY2026 Earnings: Cloud AI Strength Hits $81.3B Revenue (+17%), But Record $37.5B Capex Spooks Investors

Microsoft crushed top-line expectations with $81.3 billion in revenue (+17% YoY) and non-GAAP EPS of $4.14 (+24%), but the stock plummeted 10% after-hours as investors balked at record $37.5 billion quarterly capex spending and Azure growth missing consensus estimates by 40 basis points. The company’s OpenAI investments swung GAAP EPS to $5.16, but underlying profitability metrics suggest margin pressure from AI infrastructure scaling.

About Microsoft

Microsoft Corporation (NASDAQ: MSFT) is a multinational technology giant headquartered in Redmond, Washington, with a market capitalization of approximately $3.2 trillion as of January 31, 2026. Founded in 1975 by Bill Gates and Paul Allen, Microsoft has evolved from a software licensing pioneer into a diversified cloud computing and artificial intelligence powerhouse serving over 3 billion users globally. The company operates across three primary segments: Productivity and Business Processes (Microsoft 365, LinkedIn, Dynamics 365); Intelligent Cloud (Azure, Server products); and More Personal Computing (Windows, Xbox, Surface devices). With approximately 221,000 employees worldwide and a P/E ratio of 27.12, Microsoft has strategically positioned itself as a primary beneficiary of enterprise AI adoption through its deep partnership with OpenAI, creator of ChatGPT.

The company’s dividend yield stands at 0.78%, reflecting its capital allocation priorities toward reinvestment in cloud infrastructure and shareholder returns. Microsoft’s institutional dominance in enterprise productivity software, combined with its cloud and AI capabilities, positions it as one of the “Magnificent Seven” mega-cap technology stocks driving market performance in 2026.

Top Financial Highlights

1. Total Revenue: $81.3 billion, up 17% year-over-year in constant currency terms (up 15% reported currency)
2. Operating Income: $38.3 billion, increased 21% year-over-year, reflecting strong operating leverage despite capex pressures
3. Net Income (Non-GAAP): $30.9 billion, up 23% year-over-year; GAAP net income $38.5 billion (up 60%) includes $7.6 billion in OpenAI investment gains
4. Diluted EPS (Non-GAAP): $4.14, up 24% year-over-year (up 21% in constant currency); GAAP EPS $5.16, up 60% reflecting one-time OpenAI mark-to-market gains
5. Gross Margin: 68.6%, down 220 basis points from 70.8% in Q2 FY2025, signaling AI infrastructure scaling pressures
6. Microsoft Cloud Revenue: $51.5 billion, up 26% year-over-year (up 24% constant currency), crossing $50B milestone for first time
7. Azure and Cloud Services: +39% growth year-over-year (up 38% constant currency), beating reported consensus of 39.4% by 40 basis points
8. Commercial Remaining Performance Obligation (cRPO): $625 billion, surged 110% year-over-year, indicating strong future revenue visibility from multi-year enterprise commitments
9. Operating Cash Flow: $22.3 billion (Q2 only); $56.5 billion (first half FY2026), down year-over-year due to capex timing
10. Capital Expenditure (Capex): Record $37.5 billion in Q2 (including $29.9B property/equipment additions), up 66% year-over-year from $22.6B in Q2 FY2025—the primary driver of investor concern
11. Cash, Cash Equivalents & Short-Term Investments: $94.6 billion, providing substantial liquidity for ongoing AI infrastructure investments
12. Segment Revenue Breakdown:
13. Productivity & Business Processes: $34.1 billion (+16% YoY)
14. Intelligent Cloud: $32.9 billion (+29% YoY)
15. More Personal Computing: 14.3 billion (−3% YoY)
16. Shareholder Returns: $12.7 billion returned via dividends and share repurchases in Q2, up 32% year-over-year

Beat or Miss?

While Microsoft delivered operational beats on top-line metrics, the market fixated on two misses: (1) Azure’s 39% growth fell short of StreetAccount’s 39.4% consensus, a razor-thin margin that nonetheless signaled potential deceleration or competitive pressure; (2) More Personal Computing segment guidance for Q3 implied only $12.6 billion in revenue, substantially below the $13.7 billion consensus, suggesting Windows weakness persists. Most critically, the record $37.5 billion capex—a staggering 66% year-over-year increase—triggered widespread investor anxiety about AI infrastructure returns.

What Leadership Is Saying

“We are only at the beginning phases of AI diffusion and already Microsoft has built an AI business that is larger than some of our biggest franchises. We are pushing the frontier across our entire AI stack to drive new value for our customers and partners.” — Satya Nadella, Chairman and Chief Executive Officer, Microsoft

Nadella’s statement underscores Microsoft’s confidence in AI market penetration and its competitive positioning through OpenAI partnership. The framing—that AI itself already constitutes a business larger than legacy Microsoft franchises—signals management’s conviction that AI monetization is not a future aspiration but an immediate reality. This confidence, however, clashes with the market’s skepticism about the return on $37.5 billion quarterly capex.

“Microsoft Cloud revenue crossed $50 billion this quarter, reflecting the strong demand for our portfolio of services. We exceeded expectations across revenue, operating income, and earnings per share.” — Amy Hood, Executive Vice President and Chief Financial Officer, Microsoft

Hood’s measured optimism on cloud demand and beat-across-the-board messaging emphasizes the company’s execution excellence. However, her statement conspicuously omits commentary on capex efficiency or AI infrastructure ROI—a notable silence that likely fueled investor concerns about whether the company has fully grappled with the profitability implications of its AI spending binge.

Microsoft Q2 FY2026 vs. Q2 FY2025 Historical Comparison

Key Observations

• Revenue acceleration outpaces expense growth: Revenue is up 16.8%, yet operating expenses remain flat, indicating strong operational leverage and Microsoft’s ability to scale cloud services without proportional cost increases.
• Cloud revenue growth momentum: At +26% year-over-year, Microsoft Cloud significantly outpaces total company revenue growth (+17%), confirming that cloud/AI services have become the primary engine of expansion.
• Profitability compression despite revenue beats: Despite strong revenue and operating income growth, gross margin contracted 220 basis points (from 70.8% to 68.6%), a direct result of AI infrastructure scaling costs. This suggests that while topline growth is healthy, the quality of earnings is deteriorating as capex intensifies.
• Capex explosion outpaces profitability: Capital expenditure jumped 66% year-over-year, far exceeding revenue growth of 17%. This divergence is unsustainable if not accompanied by proportional revenue growth in future quarters.

Segment Performance Deep Dive

Productivity and Business Processes: $34.1B (+16% YoY)

This segment, comprising Microsoft 365, LinkedIn, and Dynamics 365, delivered solid mid-teens growth despite a maturing market. Microsoft 365 Commercial cloud revenue grew 17%, with management commentary highlighting continued ARPU (average revenue per user) expansion driven by Copilot Pro adoption and E5 tier upgrades. LinkedIn grew 11%, modestly below historical double-digit trends, reflecting broader economic caution in enterprise hiring and professional networking activity. Dynamics 365’s 19% growth remained robust, suggesting enterprise demand for CRM and ERP solutions persists even amid AI capex uncertainty.

Implication: This segment demonstrates the stickiness of Microsoft’s productivity ecosystem but provides limited upside surprise given steady-state adoption patterns. Growth acceleration here requires either new product innovation (Copilot integration delivering measurable ROI) or unforeseen demand shocks.

Intelligent Cloud: $32.9B (+29% YoY)

The company’s flagship AI and cloud engine, Intelligent Cloud grew 29% year-over-year, with Azure driving the majority of expansion at +39%. This segment’s $13.9 billion operating income, while growing, reflects a 400-basis-point gross margin decline, directly attributable to infrastructure scaling. Azure’s 39% growth, while impressive in absolute terms, represents a marginal deceleration from the 38.5% range in prior quarters, and specifically missed StreetAccount’s 39.4% consensus by 40 basis points—a signal of potential competitive encroachment from Google Cloud (+34%) and AWS (+20%).

Implication: Azure remains the growth flagship, but margin compression and consensus misses suggest Microsoft’s cloud position faces subtle competitive pressures. The company’s massive capex bet on AI infrastructure is fundamentally a wager that current growth rates can be sustained or accelerated once AI monetization fully materializes.

More Personal Computing: $14.3B (−3% YoY)

The troubling segment. More Personal Computing declined 3% year-over-year, reflecting Windows OEM weakness, Xbox content and services headwinds (down 5%), and Search revenue growth of only +10%. Management guided Q3 More Personal Computing revenue to approximately $12.6 billion, implying continued 8% year-over-year decline—a structural headwind that suggests consumer demand remains subdued. Windows OEM grew only 1%, essentially flat, indicating PC refresh cycles remain depressed and competitive dynamics with Chromebooks have not reversed.

Implication: More Personal Computing is in secular decline as a revenue contributor. While absolute revenue remains material at $14.3B, the segment’s inability to stabilize or grow underscores the existential challenge to personal computing amid smartphone ubiquity and cloud proliferation. This weakness also suggests that enterprise PC demand for AI-enabled upgrades (e.g., Copilot+ PCs) has not yet meaningfully accelerated sales.

Competitive Positioning: The Big Tech Earnings Gauntlet

Key Takeaways

• Revenue Scale: Apple dominates absolute revenue ($143.8B), nearly 2x Microsoft’s $81.3B, though Microsoft’s 17% YoY growth matches Apple’s 16%. Amazon leads at $180.2B, reflecting retail’s scale. Alphabet at $102.4B ranks third in pure cloud/software comparison.
• Profitability: Microsoft’s non-GAAP net income of $30.9B trails Apple’s $42.1B but exceeds Alphabet’s reported ~$35B and Amazon’s $21.2B. Per-dollar profitability: Microsoft 38% net margin, Apple 29%, Alphabet 34%, Amazon 12%—Microsoft boasts superior operating leverage in cloud services.
• Capital Intensity Crisis: Amazon’s capex of $50.9B YTD (232% of quarterly net income) represents an unsustainable burn rate for AI infrastructure. Microsoft’s $37.5B quarterly capex (120% of quarterly non-GAAP net income) is alarming but somewhat more defensible than Amazon’s trajectory. Alphabet’s capex intensity remains more moderate, and Apple’s capex remains negligible as a % of profit.
• AI Monetization Reality: None of the megacap tech giants have definitively proven that their AI infrastructure capex will generate proportional revenue growth. Microsoft’s Azure accelerating at “only” 39% (vs. consensus 39.4%) is a canary in the coal mine—suggesting that even market leaders cannot guarantee 40%+ growth indefinitely once capex reaches these levels.

Investor Reaction and Market Implications

Microsoft’s stock tanked nearly 10% following the earnings announcement, plummeting from $481.63 on the day of announcement (January 28, 2026) to $433.50 the next trading session—a $48 drop representing approximately $357 billion in market capitalization erosion. This dramatic selloff occurred despite the company beating revenue and EPS expectations, underscoring a fundamental shift in investor sentiment away from pure growth metrics and toward profitability quality and capital efficiency.

Primary Catalysts for the Selloff

• Azure deceleration signal: Azure’s 39% growth, while robust, fell 40 basis points short of StreetAccount consensus at 39.4%. This marginal miss, though seemingly trivial, triggered algorithmic selling and rebalancing among quants who view Azure growth as the primary valuation driver. In a market obsessed with AI purity plays, any sign of deceleration, however slight, is punished.
• More Personal Computing collapse: Guidance for Q3 implied $12.6B in revenue, a ~8% year-over-year decline. Investors fear this segment may become perpetually negative, reducing Microsoft’s addressable market and forcing the company into a “cloud-only” identity with limited diversification.
• Capex concerns across Big Tech: Microsoft’s $37.5B quarterly capex, combined with Amazon’s $50.9B YTD burn, triggered broader anxiety across the technology sector about whether massive AI infrastructure spending will ever generate proportional returns. If capex/revenue ratios remain elevated, technology stocks may face multiple compression as investors demand higher returns on invested capital (ROIC).
• Valuation rerating: At a P/E of 27.12, Microsoft was trading at a premium to historical averages. The earnings miss on Azure and Windows, combined with capex concerns, gave institutional investors license to de-rate the stock from 30x earnings to sub-26x—a downward multiple revision that mathematically explains much of the $357B selloff.

Bullish Counter-Narrative: Microsoft’s cRPO of $625B (up 110% YoY) represents an enormous forward revenue pipeline, effectively de-risking future growth. The company’s non-GAAP profitability remains excellent, with net margins of 38% demonstrating that AI services can generate substantial bottom-line profits. Azure’s 39% growth, although below consensus, remains among the fastest rates of growth in enterprise software services globally. Additionally, management’s confidence in AI-driven business transformation suggests that near-term capex pressures will ultimately yield outsized returns once AI adoption inflects.

Financial Strength and Balance Sheet

Microsoft maintains one of the strongest balance sheets in corporate America. Cash, cash equivalents, and short-term investments totalled $94.6 billion, providing sufficient liquidity for ongoing capital expenditures and strategic investments. Long-term debt stood at $40.2 billion, with total liabilities of $275.5 billion and total assets of $619 billion, yielding a debt-to-assets ratio of 44.5%, which is conservative by industry standards. Stockholders’ equity reached $343.5 billion, reflecting a robust 55.5% equity-to-assets ratio. The company returned $12.7 billion to shareholders in the quarter via dividends and share repurchases, up 32% year-over-year, indicating management’s confidence despite capital expenditure pressures.

Forward Guidance and Strategic Outlook

Microsoft did not provide explicit numerical guidance for Q3 revenue or earnings, maintaining its historical practice of offering limited forward visibility. However, management commentary and segment disclosures implied the following:

• More Personal Computing: Guidance of ~$12.6B for Q3 (vs. $14.7B in Q3 FY2025) implies an 8% year-over-year decline, suggesting Windows and gaming segments remain under secular pressure.
• Intelligent Cloud: No specific guidance provided, but management’s emphasis on Azure momentum and commercial RPA acceleration to $625B suggests high confidence in continued 25-30% segment growth.
• Productivity and Business Processes: Expected to maintain mid-teens growth, with Copilot adoption and Microsoft 365 commercial ARPU expansion as primary drivers.
• Capital Allocation: Management is clearly committed to aggressive AI infrastructure capex, signaling expectations for sustained $30-40B quarterly capex through at least calendar 2026. This suggests the company views AI infrastructure buildout as a multi-year, non-negotiable strategic imperative.
• Margin Expectations: The 220-basis-point gross margin decline signals that compressed margins may persist through H1 2026 before stabilizing, assuming capex intensity plateaus.

Key Risks and Caveats

• Capex ROI Uncertainty: The company’s willingness to deploy $37.5B in capex quarterly is predicated on the assumption that AI services will generate commensurate revenue growth and customer adoption. If Azure growth decelerates below 30% or cloud margins compress further, the capex intensity will become unjustifiable.
• Azure Competitive Pressure: Google Cloud’s 34% growth (vs. Azure’s 39%) and AWS’s reacceleration to 20% growth (vs. slower prior quarters) suggest competitive dynamics are intensifying. Microsoft’s market share leadership may be at risk if competitors offer more compelling AI services or pricing.
• Windows/Personal Computing Secular Decline: The -3% to -8% trend in More Personal Computing is alarming and may reflect structural shifts toward cloud-native workloads and mobile computing that Microsoft cannot reverse. This headwind could persist indefinitely.
• Macro Economic Sensitivity: While enterprise capex remains strong, recessionary conditions or corporate IT budget freezes could rapidly decelerate cloud spending and Azure adoption rates.
• OpenAI Dependency and Valuation: The $7.6B gain from OpenAI investments is a one-time mark-to-market gain that inflated GAAP earnings. If OpenAI’s valuation deteriorates due to competitive pressures or technological setbacks, Microsoft could face significant impairment charges.

Conclusion

Microsoft’s Q2 FY2026 earnings represent a paradoxical outcome: exceptional operational execution paired with profound investor concerns about capital efficiency and AI ROI sustainability. The company achieved revenue of $81.3B (+17% YoY), delivered strong Azure growth (+39%), and crossed a symbolic $50B cloud revenue milestone while maintaining 38% non-GAAP net margins. Yet the market’s 10% shellacking reflects a new investor paradigm where growth metrics have been subordinated to questions of capex discipline and profitability quality.

The $37.5B quarterly capex—a 66% year-over-year surge—is the critical variable determining Microsoft’s valuation trajectory. If this spending yields Azure growth acceleration back to 40%+ and cloud margin expansion in H2 2026, the market will vindicate management’s strategy, and the stock may recover. Conversely, if capex intensity persists while growth moderates, Microsoft could face prolonged multiple compression as the market applies higher discount rates to speculative AI infrastructure spending.

For long-term investors, Microsoft remains a high-quality business with fortress-like market positions in productivity software, enterprise cloud, and AI services. However, the near-term risk-reward profile has deteriorated materially. The path to validating the current capex intensity requires Azure reacceleration, Windows stabilization, and demonstrable AI monetization—none of which are guaranteed. Until capex ROI metrics improve materially, Microsoft’s stock is likely to remain volatile and vulnerable to AI-related sector rotations.