Microsoft reported its second quarter earnings after the bell Wednesday.
Microsoft (MSFT) reported its second quarter earnings after the bell on Wednesday, beating Wall Street estimates on the top and bottom lines, with cloud revenue topping $50 billion for the first time.
But the company's stock fell over 11% Thursday as investors worried about that cloud growth slowing — and about the company's ballooning AI-fueled spending.
“We are only at the beginning phases of AI diffusion, and already Microsoft has built an AI business that is larger than some of our biggest franchises," CEO Satya Nadella said in a statement.
Microsoft is one of the biggest beneficiaries of the AI explosion, thanks to its early investments in ChatGPT developer OpenAI, sending its market capitalization above the $4 trillion mark in July. But it's come down from those highs as investors continue to raise concerns about the AI industry's massive spending.
In Q2, earnings per share (EPS) of $5.16 on revenue of $81.27 billion topped the $3.92 and $80.3 billion Wall Street was anticipating.
Microsoft Cloud revenue came in at $51.5 billion, just ahead of an expected $51.2 billion. The company reported Cloud revenue of $40.9 billion in the same period last year.
Microsoft’s Productivity and Business Processes, which includes revenue from Microsoft 365 Commercial and Consumer Cloud, hit $34.1 billion. Wall Street was expecting $33.6 billion.
The company's Intelligent Cloud business, which includes Azure sales, brought in $32.9 billion, beating estimates of $32.2 billion.
"Maybe it wasn't high enough for people who wanted a higher number," RBC Capital Markets managing director Rishi Jaluria told Yahoo Finance.
Remaining performance obligations (RPO), or the value of contracts Microsoft has with customers that haven't been paid out yet, hit $625 billion. Some 45% of that comes from OpenAI commitments. The number has become a key metric to help Wall Street better gauge overall AI demand.
Microsoft continues to face AI capacity constraints, meaning customer demand for AI is outpacing Microsoft’s ability to supply it, putting an artificial cap on the Windows maker’s revenue.
That’s also why the company is pouring billions more into capital expenditures, which hit $37.5 billion in the quarter, up from $22.6 billion in the second quarter of 2025.
The company's More Personal Computing business, which is comprised of sales of its Surface and Xbox products, as well as Windows software, generated $14.3 billion, in line with expectations.
Microsoft’s stock price is now down over the past 12 months, falling short of cloud rival Amazon (AMZN). Both companies, however, are being blown away by Google’s (GOOG, GOOGL) stock, which is up a stunning 69% over the last 12 months.
Much of that growth is tied to the debut of Google’s Gemini 3, which established the company as the AI model leader ahead of Microsoft ally OpenAI (OPAI.PVT) and its ChatGPT.
Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.
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Comments
> Microsoft continues to face AI capacity constraints, meaning customer demand for AI is outpacing Microsoft’s ability to supply it, putting an artificial cap on the Windows maker’s revenue.
Strangely, all I hear about is how annoyed people are with MS shoving AI into everything. Who are these "customers"?
By boh 2026-01-2918:13 I think this is part of their circular financing "magic". The "customers" are likely OpenAI and Anthropic, who Microsoft is paying to use their infrastructure (so the "customer" who is paying for the AI capacity is Microsoft).
By benttoothpaste 2026-01-2917:521 reply The customers here are the executives that then require everyone in their companies to "use AI". It's an old and trusted business model of selling software not to the users, but to their managers.
By yfw 2026-01-2921:57 Llm mlm
By a99p 2026-01-2919:36 AI adoption and investment is incestuous. Many major customers and investors of Microsoft are themselves heavy proponents of AI, so they need increased AI adoption to justify and sustain the extent to which they've already bought in.
By ThrowawayB7 2026-01-2923:52 Reuters reports (https://www.reuters.com/business/retail-consumer/microsoft-e...) "CEO Nadella revealed for the first time that Microsoft now has 15 million annual users for M365 Copilot, the $30 per month AI assistant that is Microsoft's main offering for business users." so in theory that's $5.4 billion in revenue.
By saidinesh5 2026-01-2918:09 Other companies deploying LLMs to automate their tasks? Other start ups / companies building AI products?
By cosmicgadget 2026-01-2921:02 Enterprises that are excited to replace people with agents.
Haha "customers". Nobody cares about customers anymore. Investors are all that matter. They're the ones who want to see AI. Once you've pleased the investors, profitability is just accounting tricks.
As the adage says, if something is free, you're not the customer, you're the product.
By therobots927 2026-01-2917:59 The new adage is: even if you’re a paying customer you’re not the customer. You’re the product
By cal_dent 2026-01-305:20 the customers are all those annoyed people i'm afraid. spreadsheets just record it as another number whether you like it/wanted it or not
Not long ago, someone here thought OpenAI bulls investing in MSFT could be a good way to indirectly profit from OpenAI. I pointed out that you really had to weigh that against Microsoft's potential risks (pretty banal advice, really). Even though I hadn't made any prediction about which way MSFT would go, a bunch of people piled on me like it was utterly inconceivable that MSFT could go down because of cloud gains.
Just a friendly reminder that it's not just LLMs that can be confidently wrong.
By gritspants 2026-01-2918:19 "When a true genius appears in the world, you may know him by this sign, that the dunces are all in confederacy against him."
By KellyCriterion 2026-01-2918:08 same with SAP/EU: down by 10%+ because of "missed investors expectations" LOL
(imagine: A company bringing in billions, laying off people in parallel, and then claiming "the business does not make enough money" - crazy!)
