Why Microsoft stock dropped after earnings

Core Viewpoint - Microsoft shares have fallen over 11% due to concerns about capital expenditure (capex) plans, despite exceeding second-quarter earnings estimates [1][36] Group 1: Capital Expenditure and Investor Sentiment - Microsoft’s capex for Q2 reached nearly $38 billion, exceeding street expectations, which has spooked investors [58] - The company is facing capacity constraints and has indicated that Azure revenue could have been significantly higher without these constraints [5][12] - In contrast, Meta's capex plans were initially met with skepticism but have since been positively received following strong quarterly results [2][3] Group 2: Azure Performance and Growth Metrics - Azure's revenue grew by 38% in constant currency, adding approximately $9 billion in annual recurring revenue (ARR) sequentially, which was a broad-based beat across the portfolio [6][58] - Microsoft has 15 million subscriptions for its M365 co-pilot, which is a relatively small number compared to its overall user base [38][60] - Microsoft Fabric has reached $2 billion in ARR, reflecting a 60% increase since its launch less than two years ago, indicating strong growth potential [15] Group 3: AI Demand and Strategic Positioning - There is unprecedented demand for AI, driven by both model providers and enterprise adoption, which Microsoft is strategically positioned to capitalize on [13][20] - OpenAI contributes significantly to Microsoft’s commercial backlog, representing 45% of the remaining performance obligations (RPO), which is seen as a strength rather than a liability [18][19] - Microsoft’s products are designed to be model-agnostic, allowing flexibility in utilizing various AI technologies, which mitigates dependency on any single provider [20] Group 4: Market Dynamics and Future Outlook - The market is currently skeptical about the ability of software companies to navigate the evolving landscape of AI and LLMs, leading to pressure on companies like Salesforce and Microsoft [21][25] - Accelerating growth and demonstrating proof points around AI adoption are critical for companies to regain investor confidence [29][30] - The current market pullback is viewed as a potential buying opportunity for quality names like Microsoft, as long-term growth prospects remain strong [27][33]