Microsoft shares fall after FY2026 earnings: Here’s how analysts reacted

Microsoft (NYSE: MSFT ) released its fiscal 2Q26 results after markets closed on Wednesday. The report was not well received by markets, and the stock fell nearly 10% yesterday, its one-day loss since 2020. Here are the key takeaways from the report and analyst reactions to the earnings.

Key Takeaways from MSFT’s Earnings Report

Microsoft reported revenue of $81.3 billion, up 17% year over year, beating consensus estimates of $80.27 billion. The company’s non-GAAP earnings per share came in at $4.14, beating analysts’ expectations of $3.97. The company’s massive investment in artificial intelligence (AI) infrastructure was evident, with capital spending up 66% to $37.5 billion as Microsoft builds physical capacity, including its own Maia and Cobalt chips, to meet unabated demand for generative AI services.

Microsoft has seen broad growth

Here’s a look at how Microsoft’s various business segments fared in the quarter.

• Intelligent Cloud: This segment remains the company’s main growth driver, with revenue up 29% to $32.9 billion. Within that, Azure and other cloud services revenue grew 39%, driven by massive demand for AI infrastructure and a customer base that is increasingly migrating workloads to the cloud to support the training and inference of large-scale models. However, the growth rate moderated slightly from the 40% growth Microsoft reported in the previous quarter.
• Productivity and Business Processes: Revenue grew 16% to $34.1 billion. Growth was driven by Microsoft 365 commercial cloud (up 17%) and a remarkable 29% increase in consumer cloud revenue. Additionally, Dynamics 365 grew by 19%, highlighting the steady integration of AI “agents” into business workflows across platforms such as Agent 365.
• More personal computers: This segment saw a slight contraction, with sales down 3% to $14.3 billion. While Windows OEM sales showed resilience with 5% growth (supported by the impending end of support for Windows 10), the segment was weighed down by a 32% decline in Xbox hardware sales, reflecting a cooling global console market.

Microsoft’s cloud revenue tops $50 billion

Meanwhile, Microsoft hit a key milestone with its December quarter cloud revenue surpassing $50 billion for the first time. The company is very bullish on the AI ​​opportunity, and during the earnings call, CEO Satya Nadella said, “We’re in the early stages of the diffusion of AI and its broad impact on GDP. Our TAM will grow substantially across every layer of the technology stack as that diffusion accelerates and expands. In fact, even in these early shifts, we’ve built some of our biggest francs that have taken decades larger than decades of our business.

Microsoft provided positive guidance

Looking ahead to the third quarter of fiscal 2026, Microsoft provided a confident outlook with revenue expected between $80.65 billion and $81.75 billion, representing a growth rate of 15-17%. The company expects Azure revenue growth to remain strong at around 37-38% in constant currency. Guidance was largely in

While high capital expenditures are expected to continue to weigh on short-term margins, CFO Amy Hood said Microsoft Cloud gross margins should hover around 65% as efficiency gains from optimizing its own silicon and “tokens per watt” begin to offset the high cost of acquiring GPUs.

Analysts cut their price targets on Microsoft

Despite the drop in Microsoft’s stock price, Wall Street analysts maintained their bullish view, even as many cut their price targets.

Morgan Stanley’s Keith Weiss noted that the market “can’t see the forest for the trees.” The perceived slowdown is not 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 Azure customers, KPI growth would have exceeded 40%.

“The debate is no longer about demand, it’s about the timing of capacity,” added Evercore’s Kirk Materne.

Dan Ives of Wedbush Securities cut his price target to $575 from $625. “The company is benefiting from the increased momentum seen in the AI ​​revolution … the weak share price presents strong buying opportunities for long-term investors. We said this is a multi-year journey,” Ives said in a note.

JPMorgan also lowered its price target on Microsoft from $575 to $550, while maintaining its outperform rating. JPMorgan analyst Mark Murphy said in a note: “Microsoft showed a ‘solid demand picture’ in its quarterly results…Underlying factors include softness in the less critical gaming and search segments and CPU/GPU capacity constraints in Azure.”

Goldman Sachs lowered its price target on MSFT

Goldman Sachs’ Gabriela Borges cut her price target on Microsoft from $655 to $600, while maintaining her buy rating. “We believe the stock’s reaction reflects another consecutive quarter of higher-than-expected capital spending without a commensurate increase in Azure growth. Trading on Azure’s short-term growth could lead to more AI-driven growth in the long term.”

KeyBanc also cut its price target on Microsoft from $630 to $600, and analyst Jackson Ader said in a note: “We know the short-term pain is real – we’re experiencing it right now. But we don’t know if the long-term gain is real. We have to wait for the investment to return.”

Matt Britzman of Hargreaves Lansdown also expects AI to drive Microsoft’s long-term growth.

“Demand for AI is so strong that Microsoft can’t build capacity fast enough. AI services are driving a large and ever-increasing chunk of Azure’s growth… that’s a trend we expect to continue.”

OpenAI accounts for a large portion of MSFT’s cloud backlog

Microsoft disclosed that its commercial remaining performance obligation (RPO) was $625 billion. What is worrying, however, is the fact that OpenAI accounts for 45% of this backlog. Notably, Microsoft is OpenAI’s largest investor and its wealth is closely tied to the AI ​​startup.

“The backlog is really good, but the revelation that OpenAI is 45% of their backlog goes back to where OpenAI can hit those financial targets and pay Oracle, Microsoft and a lot of providers,” Jefferies analyst Brent Thill said. CNBC.