What Went Wrong With Microsoft Stock?

Core Insights - Microsoft exceeded earnings expectations with Q2 fiscal 2026 revenue of $81.27 billion and EPS of $4.14, surpassing the anticipated $80.27 billion and $3.97 respectively [2][8] - Despite positive earnings, the stock dropped 7% after hours due to slowing Azure growth and significant reliance on OpenAI, which accounts for 45% of its $625 billion backlog [2][3][9] Financial Performance - Q2 revenue increased by 17% year-over-year, driven by strong cloud and productivity software growth, with Microsoft 365 Copilot reaching 15 million paid subscriptions [8] - Q3 revenue guidance is projected between $80.65 billion and $81.75 billion, aligning with consensus expectations, indicating no positive surprise [7] Growth and Margins - Azure's growth guidance for Q3 is projected at 37-38% in constant currency, barely meeting the 37.1% consensus, reflecting a deceleration trend over three consecutive quarters [2][9] - Operating margin guidance for Q3 is approximately 45.1%, below the 45.5% consensus, as Microsoft increases investments in AI infrastructure with quarterly capital expenditures of $37.5 billion [4][6] Backlog and Risks - OpenAI's commitment to $250 billion in cloud spending inflated Microsoft's backlog by 110% year-over-year, but excluding OpenAI, the backlog only expanded by 28% [6] - The heavy reliance on OpenAI raises concerns about revenue generation and the potential impact on Microsoft's financial stability if OpenAI fails to meet its obligations [3][6] Valuation and Market Sentiment - Microsoft currently trades at a P/E ratio of around 30x, which is not excessive but reflects market concerns over growth acceleration in AI [10] - The stock's current valuation presents an attractive entry point, with a potential upside of 35% based on the Street's average estimate of $620 [10][12]