Microsoft reported fiscal second-quarter results showing Azure revenue growth that narrowly topped expectations, but record capital spending on AI infrastructure and a slight cloud-growth slowdown unsettled investors.
Shares fell sharply after the report, with Reuters describing a drop of more than 7% in after-hours trading and CNBC reporting a nearly 10% slide on Thursday that erased about $357 billion in market value by the close.
Microsoft said Azure revenue grew 39% in the October-to-December period, which the company counts as its fiscal second quarter. Reuters said that figure was just ahead of a Visible Alpha consensus estimate of 38.8%.
Overall, Microsoft’s total revenue rose 17% to $81.3 billion for the quarter, topping the $80.27 billion analysts expected, according to LSEG data cited by Reuters. CNBC similarly reported revenue of $81.27 billion versus an $80.27 billion consensus estimate.
Even with the revenue beat, investors focused on what Microsoft spent to keep up with demand for cloud and AI services. Bloomberg reported capital expenditures of $37.5 billion in the quarter, up 66% from a year earlier and above analysts’ estimates cited by Bloomberg.
Stock drops despite earnings beat
CNBC described the sell-off as a reaction to cloud growth that “fell short of investors’ elevated expectations,” even though Microsoft delivered quarterly earnings and revenue above forecasts. CNBC reported adjusted earnings of $4.14 per share, higher than the $3.97 estimate from analysts surveyed by LSEG.
A key concern was that Azure and other cloud services grew 39%, down from 40% growth in Microsoft’s fiscal first quarter, according to CNBC. CNBC also reported that StreetAccount expected 39.4% growth for Azure and other cloud services, making the reported 39% look like a miss against that benchmark.
The market reaction was large enough to ripple into broader tech trading, with CNBC reporting the iShares Tech- sector exchange-traded fund fell about 5% the same day Microsoft shares plunged. CNBC also reported Microsoft’s market capitalization fell by $357 billion, leaving it at $3.22 trillion by the end of Thursday’s session.
Record AI capex and OpenAI exposure
Microsoft’s heavy AI investment is now central to how the market judges its cloud story. Bloomberg said investors worried it could take longer than expected for Microsoft’s AI investments to pay off as spending hit a record and cloud sales growth slowed.
Reuters also framed the quarter as a test of patience, saying Microsoft’s marginal beat on cloud expectations amplified doubts about the payoff from hefty AI spending while competition intensifies. Reuters reported that Microsoft has long benefited from an early bet on OpenAI, whose technology supports many Microsoft offerings, including M365 Copilot.
That OpenAI relationship is also a risk factor investors are watching closely. Reuters reported Microsoft’s contracted cloud backlog more than doubled to $625 billion, and said about 45% of Microsoft’s remaining performance obligations were driven by OpenAI alone.
Guidance points to steady cloud growth
Looking ahead, Microsoft forecast Azure revenue growth of 37% to 38% for the current fiscal third quarter, according to Reuters. Reuters said that compares with a Visible Alpha analyst estimate of 36.41%.
Reuters also reported Microsoft forecast overall sales with a midpoint of $81.2 billion, essentially in line with analyst estimates cited by Reuters. CNBC likewise said Microsoft’s guidance for the current quarter aligned with LSEG expectations, even as the stock sold off.
Some analysts argued the market may be overreacting to near-term growth optics. CNBC quoted Bernstein analysts led by Mark Moerdler praising Microsoft’s approach and writing: “We believe investors need to recognize that management made a deliberate choice to prioritize the long-term health of the company over short-term stock price increases.”
Competition adds pressure to prove returns
Microsoft is not making its AI investments in a vacuum, and rivals are racing to capture enterprise and consumer AI demand. Reuters pointed to “a strong reception” for Google’s latest Gemini model and the emergence of autonomous agents such as Anthropic’s Claude Cowork as risks to Microsoft’s AI business and its long-standing software offerings.
At the same time, the spending surge is industry-wide. Reuters reported Microsoft, Alphabet, Meta, and Amazon are collectively expected to spend more than $500 billion on AI this year.
For Microsoft, the immediate question is whether the combination of record AI infrastructure spending and ongoing cloud growth can translate into margins and durable revenue expansion fast enough to satisfy investors.
