Microsoft's stock posted its worst drop since 2020. What's wrong with the business?

Shares of cloud service owner and software developer Microsoft plummeted by 12% in trading on January 29, which was the maximum drop in almost six years. Investors sold off the company's securities after the publication of the quarterly report, which recorded record capital expenditures on AI, and also reflected a slowdown in the growth of cloud infrastructure sales. This increased investors' concerns that the return on investment in artificial intelligence may take longer than expected, Bloomberg writes.

Quotes of Microsoft shares in the course of trading fell by 12.1%, to $423.4. This is the largest intraday decline since March 2020, Bloomberg writes. Investors began selling off shares after the software developer and cloud service owner said in a report for the second quarter of fiscal 2026 that capital expenditures totaled $37.5 billion - that's 66% more than a year earlier and above the consensus forecast of $36.2 billion. Revenue from the Azure cloud division, adjusted for currency fluctuations, grew 38%, which matched analysts' expectations, Bloomberg writes. The growth rate slowed by 1 p. p. compared to the previous quarter. Microsoft forecasts Azure growth of 37-38% in the current quarter.

"One of the key issues that investors are concerned about right now is that capital expenditures are growing faster than we expected and Azure is probably growing a little slower than we would like," Bloomberg quoted Morgan Stanley analyst Keith Weiss as saying. He said the market is concerned about the return on that investment.

Microsoft CFO Amy Hood noted on a conference call after the reports were released that some of the new capacity is being used by internal Microsoft teams, including those developing the Copilot AI assistant products. If all those resources were allocated to Azure, the cloud growth rate would be "noticeably higher," she emphasized.

Microsoft is demonstrating rapid growth in the cloud business, including through a partnership with the leader in the field of AI - OpenAI company, writes Bloomberg. However, despite large-scale investments in data centers, Microsoft faces a shortage of available capacity to meet demand, the agency stresses.

Microsoft CEO Satya Nadella said on the call that Microsoft enterprise customers have already signed up 15 million subscriptions to M365 Copilot, the company's key AI product for office workers. He emphasized that Copilot usage continues to grow across the broad enterprise segment.

Microsoft's total revenue for the quarter rose 17% to $81.3 billion, with earnings per share reaching $5.16. According to Microsoft's statement, net income was boosted by a gain from its investment in OpenAI, which added $1.02 to the bottom line per share. Analysts had expected $80.3 billion in revenue and $3.92 in earnings per share, Bloomberg writes.

Microsoft's customer liabilities that will translate into revenue in the future more than doubled year-over-year to $625 billion - mostly due to a $250 billion contract with OpenAI. OpenAI accounts for 45% of that backlog.

Wall Street doesn't expect Microsoft shares to fall on the 12-month horizon: the consensus price target of 64 analysts tracking the company's stock, according to MarketWatch, is $623, up 29.3% from the previous day's closing price. Meanwhile, 62 analysts advise buying the stock, and only two advise holding the stock in their portfolios. There are no recommendations to sell the stock.

This article was AI-translated and verified by a human editor