Microsoft’s stock price fell 6.15% in the aftermarket despite Q2 reports that beat Wall Street Estimates. Last close was at $481.63, from where the price fell to the current pre-market rate of $452. Microsoft reported a revenue of $81.3 billion and a capital expenditure of $37.5 billion.
The company reported a cloud revenue of $51.5 billion, which signals Azure’s (Microsoft’s cloud computing division) accelerated growth amid increasing demand for AI cloud services. The stock price is falling despite promising numbers, and is driven by investor concern regarding high expenditure in the next quarter for AI infrastructure growth. Investors fear guidance on AI expansion can squeeze profits.
Cloud and AI: Microsoft Q2 Highlights
Microsoft’s Q2 report focused on its cloud and AI strengths and record-breaking revenues. The company’s revenue increased by 17%, with its operating income climbing by 21%. It earned $5.16 per share, a 31% increase from the Wall Street forecast of $3.92 per share. The report also highlighted that the revenue of Azure and other cloud services increased by 29%.
Satya Nadella said,
“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,”
chairman and chief executive officer of Microsoft. The highlighted numbers and recent policy updates from upper executives signal that the company is planning to aggressively expand on AI and cloud services to cater to the increasing demand.
Microsoft CEO also highlighted how the company is prioritising customers and data privacy by expanding its data centres locally. The company has announced seven new data centre investments in this quarter alone. This indicates the company’s public and even governmental partnerships in the AI cloud infrastructure.
Record Capex, Azure Slowdown, and Margin Squeeze
A major reason for perturbations in investor confidence includes record capex surge, slowdown of Azure’s growth, and margin squeeze fears. Q2 report indicates a $37.5 billion capex, a 66% YoY increase. Allocating more resources for AI growth can send this higher in the next report. The cloud gross margin already fell to 67% from 70%. This could further fall to 65%, significantly hurting profits.
Azure is expanding, and its revenue has breached records, yet the growth dipped to 39% from 40%. A dip in growth rate amid rampant demand for AI cloud computing is perceived as a scaling capacity limitation by investors. This has also contributed to the stock dumping following the reports.
Analyst’s Projections and Target Price
Wall Street has issued a ‘strong buy’ consensus on Microsoft with an average target price of $617.31. Indicating a projected upside of 28.17%. Gabriela Borges of Goldman Sachs sees a 36% upside with a target price of $655, while Morgan Stanley’s top analyst, Keith Weiss, projects 34.96% upside with a target price of $650.
Microsoft guided conservatively for fiscal Q3 FY2026. It projects growth, but does not give anything exciting to cause hype among investors. Moreover, companies’ expenditure on AI infrastructure is likely to hit an all-time high in Q3. Hence, the dumping of stocks in fear of squeezed margins was predictable. Investors now expect dip-buying as soon as AI backlogs shine.
