Why did msft stock fall after Microsoft beat Q2 earnings despite strong AI and cloud growth

MSFT stock fell sharply on Thursday, 29 January 2026, despite Microsoft delivering a solid second-quarter earnings beat for the period ended 31 December 2025, as investors focused on rising AI infrastructure costs, early signs of cloud growth normalising and mounting pressure on future margins, reports The WP Times editorial team.

Microsoft beat Wall Street expectations on both revenue and earnings for the quarter ended 31 December 2025, driven by record cloud sales and continued expansion of its artificial intelligence portfolio. However, the results failed to reassure markets increasingly wary of the scale, pace and concentration risks tied to Microsoft’s AI-led growth strategy. Shares fell by around 7% to 11% in extended trading, erasing tens of billions of dollars from the company’s market capitalisation, even as Microsoft reiterated its long-term commitment to artificial intelligence and cloud infrastructure investment.

Earnings beat masks investor unease

Microsoft reported revenue of $81.3bn, up 17% year on year, with operating income rising to $38.3bn, an increase of 21%. GAAP net income climbed to $38.5bn, while GAAP diluted earnings per share reached $5.16, both representing year-on-year growth of 60%. On a non-GAAP basis, which excludes the impact of investments in OpenAI, net income stood at $30.9bn, up 23%, with non-GAAP EPS of $4.14, up 24%.

The company also crossed a symbolic threshold, with Microsoft Cloud revenue reaching $51.5bn, an increase of 26%, marking the first quarter in which cloud revenue exceeded $50bn. Despite these headline gains, markets reacted negatively, highlighting a shift in investor priorities. In the current environment, earnings beats alone are no longer sufficient to sustain valuations for mega-cap technology stocks.

Key figures: Microsoft Q2 at a glance

AI spending dominates the narrative

Investor concern centred on Microsoft’s accelerating capital expenditure. The company disclosed $37.5bn in capital expenditure and finance leases for the quarter, exceeding market expectations and reflecting a sharp rise in spending on AI data centres, specialised hardware and cloud capacity.

Microsoft has committed unprecedented sums to expand infrastructure to support AI workloads for enterprise customers and major partners, most notably OpenAI. While management argues that demand for AI services continues to outstrip supply, investors are questioning whether returns will materialise quickly enough to offset the growing cost base.

Azure growth shows early signs of normalisation

Azure remains the cornerstone of Microsoft’s growth story. Revenue from Azure and other cloud services rose 39% year on year, or 38% in constant currency, marginally below the pace seen in previous quarters.

Although the slowdown is modest, markets are increasingly sensitive to any deceleration in cloud growth, particularly for stocks priced on long-term expansion. Even small deviations from expectations can trigger outsized reactions when investors are reassessing the payback period for large-scale AI investment.

Margin pressure and guidance concerns

Further weighing on sentiment was concern over margin resilience. Microsoft acknowledged that operating margins would remain under pressure as it continues to invest heavily in AI infrastructure and specialist talent. Gross margin narrowed to just over 68%, its lowest level in three years, reinforcing fears that AI — while strategically critical — may dilute profitability before delivering sustained operating leverage.

Product performance highlights

Microsoft’s Productivity and Business Processes segment generated $34.1bn in revenue, up 16%, supported by:

• Microsoft 365 Commercial cloud revenue growth of 17%
• Microsoft 365 Consumer cloud revenue growth of 29%
• LinkedIn revenue growth of 11%
• Dynamics 365 revenue growth of 19%

The More Personal Computing segment delivered $14.3bn, down 3%, with Windows OEM and Devices rising 1%, Xbox content and services falling 5%, and search and news advertising excluding traffic acquisition costs increasing 10%.

OpenAI exposure raises concentration risks

Microsoft said its commercial remaining performance obligation rose 110% to $625bn, underscoring strong future demand. However, the company disclosed that a significant share of this backlog is linked to OpenAI-related commitments, increasing investor focus on customer concentration risk and the long-term financial sustainability of key AI partnerships. Chief financial officer Amy Hood described the backlog as diversified and resilient, but some investors remain cautious about over-reliance on a narrow set of large AI counterparties.

Why msft stock fell despite strong results

The market reaction reflects a broader recalibration in how investors value AI-driven growth. Microsoft’s results confirmed operational strength but failed to provide sufficient reassurance on three fronts: returns on AI investment, durability of cloud growth and margin protection.

For msft stock, the message from markets is clear. Ambition alone is no longer enough. Investors now want measurable evidence that record-breaking AI spending can translate into predictable, scalable profits within a defined timeframe. Until that clarity emerges, even strong earnings reports may struggle to shield the stock from volatility.

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