January 15, 2026, Munich, Bavaria: 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 world’s largest corporations. (Symbol image, symbol photo, illustration, symbol photo, illustration photo, theme image, overall image, theme photo) Photo: Matthias Balk/dpa (Photo by Matthias Balk/picture Alliance via Getty Images)
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microsoft Beating Earnings Estimates — Why Did the Stock Drop 7% After Hours?
The reason is that Azure’s growth has slowed and dependence on OpenAI has become clearer. Second-quarter 2026 revenue came in at $81.27 billion, compared to expectations of $80.27 billion. EPS was $4.14, up from expectations of $3.97. Both numbers are positive surprises. However, Azure’s growth guidance for Q3 is expected to be between 37% and 38% at constant currency, just barely hitting the consensus of 37.1%.
Is cloud’s 37% growth rate still impressive? Yes and no. Investors were looking for accelerated growth, not just stabilization. More importantly, Microsoft revealed that OpenAI accounts for 45% of its $625 billion in remaining commercial performance obligations (backlog). This represents significant risk from relying on a single customer. Additionally, Microsoft expects its operating margin to decline slightly to approximately 45.1%, falling short of the consensus of 45.5% as the company increases its AI infrastructure and capital expenditures.
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OpenAI accounts for 45% of backlog
OpenAI committed $250 billion in cloud spending during the second quarter, which helped Microsoft’s backlog increase 110% year-over-year. Excluding OpenAI, the remaining backlog only grew by 28%. This is true, but poorly recognized. If OpenAI can’t generate enough revenue to pay Microsoft (and Oracle, etc.), this backlog will become irrelevant.
What about margins?
Third-quarter operating margin guidance is stated at 45.1%, which is below the consensus of 45.5%. This is the important question. Microsoft is investing $37.5 billion in quarterly capital expenditures (higher than estimates of $34.3 billion) in AI infrastructure. margins are decreasing Rather than increase.
What is your revenue guidance for the third quarter?
Revenue is expected to be between $80.65 billion and $81.75 billion, with a midpoint of $81.2 billion, exactly in line with consensus estimates. No positive surprises. For companies that are supposed to be at the forefront of the AI revolution, “on the line” performance is unsatisfactory.
Did anything work?
Actual second quarter results were good. Sales reached $81.27 billion, an increase of 17% year-on-year. EPS was $4.14, supported by strong growth in cloud and productivity software. Microsoft 365 Copilot currently boasts 15 million paid subscriptions. The fundamentals of the business remain strong.
So why do we need a market penalty?
A story of slowdown. Azure’s growth has slowed for three consecutive quarters. Capital spending is skyrocketing (quarterly run rate of $37.5 billion). Margins are facing pressure. Furthermore, 45% of the backlog is dependent on OpenAI’s solvency. This creates a great deal of uncertainty for a company with a market capitalization of $3.4 trillion.
What will the valuation be?
With a stock price of $450 and trailing EPS of $14.97, the P/E ratio is approximately 30x. This isn’t excessive for Microsoft, but it’s not cheap either. The market wants AI to accelerate, not slow down. Has pessimism finally factored into Microsoft? It certainly looks that way. Historically, MSFT has maintained a P/E ratio of 35x, but currently trades at a more modest 30x. From a valuation perspective, this represents an attractive entry point. Even if you ignore it Goal is $660the Street’s average estimate of $620 suggests a significant 35% upside from current levels.
Is this a buying opportunity or a warning sign?
It depends on whether you believe Azure’s growth will pick up again and improve margins in 2026. If capital spending results in increased revenue, Microsoft is in a good place. However, if OpenAI just makes up for its losses amid shrinking profit margins, the stock could fall further. From a risk-reward perspective, we believe the current valuation represents an attractive buying opportunity.
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