15 January 2026, Bavaria, Munich: The Microsoft logo and lettering can be seen on the Microsoft Deutschland GmbH headquarters building in Parkstadt Schwabing in Munich (Bavaria). Microsoft Corporation is the world’s largest software manufacturer and one of the largest companies in the world. (symbol image, symbol photo, illustration, symbolic photo, illustrative photo, theme image, general image, theme photo) Photo: Matthias Balk/dpa (Photo by Matthias Balk/picture alliance via Getty Images)
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Microsoft exceeded earnings expectations — why did the stock drop 7% after hours?
The reason is that Azure’s growth is slowing down, and the dependency on OpenAI has become starkly apparent. Q2 fiscal 2026 revenue reached $81.27 billion, compared to the $80.27 billion that was anticipated. EPS was $4.14, an increase from the $3.97 expected. Both figures are positive surprises. However, Azure growth guidance for Q3 was only projected at 37% to 38% in constant currency, barely hitting the 37.1% consensus.
Is a 37% growth rate for the cloud still impressive? Yes and no. Investors were looking for growth acceleration rather than merely stabilization. More critically, Microsoft revealed that OpenAI accounts for 45% of its $625 billion in remaining commercial performance obligations (backlog). This represents a significant risk due to reliance on a single customer. Additionally, Microsoft forecasts a minor decline in operating margins to approximately 45.1%, missing the 45.5% consensus, as the company increases its investments in AI infrastructure and capital expenditures.
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ForbesIs Meta Stock Headed For $900?By Trefis TeamOpenAI Represents 45% Of The Backlog
OpenAI committed to $250 billion in cloud spending during Q2, which inflated Microsoft’s backlog by 110% year-over-year. Excluding OpenAI, the remaining backlog expanded by only 28%. While this is solid, the perception is poor. If OpenAI cannot generate sufficient revenue to pay Microsoft (and Oracle, as well as others), this backlog becomes inconsequential.
What About Margins?
Q3 operating margin guidance was stated to be 45.1%, which is below the 45.5% consensus. This is the significant issue. Microsoft is investing $37.5 billion in quarterly capital expenditures (above the $34.3 billion estimate) for AI infrastructure, and margins are decreasing rather than increasing.
Revenue Guidance For Q3?
Revenue is projected to be between $80.65-$81.75 billion, with a midpoint of $81.2 billion, which aligns precisely with consensus expectations. There is no positive surprise. For a company that is supposedly at the forefront of the AI revolution, “in line” performance is not satisfactory.
Did Anything Go Right?
The actual Q2 results were positive. Revenue reached $81.27 billion, marking a 17% increase year-over-year. EPS was $4.14, supported by strong cloud and productivity software growth. Microsoft 365 Copilot now boasts 15 million paid subscriptions. The business fundamentals remain solid.
So Why The Market Penalty?
The narrative of deceleration. Azure’s growth has been diminishing for three straight quarters. Capital expenditures are soaring ($37.5 billion quarterly run rate). Margins are facing pressure. Furthermore, 45% of the backlog hinges on OpenAI’s ability to make its payments. This creates a significant amount of uncertainty for a company with a $3.4 trillion market cap.
What Does The Valuation Look Like?
With a stock price of $450 and a trailing EPS of $14.97, the P/E ratio stands at around 30x. This is not excessive for Microsoft, but it also isn’t cheap. The market desires to see AI acceleration, not deceleration. Has the pessimism finally been factored into Microsoft? It certainly appears so. Historically, MSFT has maintained a 35x P/E ratio, but it is currently trading at a more modest 30x. From a valuation perspective, this presents an appealing entry point. Even if you disregard our $660 target, the Street’s average estimate of $620 suggests a sizable 35% upside from current levels.
Is This A Buying Opportunity Or A Warning Sign?
It depends on whether you believe Azure growth will pick up again and that margins will improve in 2026. If capital expenditures yield revenue gains, Microsoft is in good shape. However, if they are merely funding OpenAI’s losses while margins contract, the stock may decline further. From a risk-reward standpoint, the current valuation appears to be an attractive buying opportunity, in our opinion.
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