The last time Microsoft reported earnings, it appeared to do every part proper, no less than by the standard metrics. Revenue was up 17%, earnings soared 24%, and the corporate’s carefully watched Azure cloud enterprise beat inside forecasts.
And then it received completely punished.
Microsoft’s inventory dropped 10% the next day, wiping out $357 billion in market worth. Investors seemed previous the standard numbers, specializing in the corporate’s report $37.5 billion in quarterly capital spending, an AI income backlog closely depending on OpenAI, and a Copilot product that had reached simply 3.3% of Microsoft 365’s industrial base.
The inventory nonetheless hasn’t recovered, ending final week down 22% from its 52-week excessive.
On Wednesday, Microsoft gets another chance, reporting its fiscal Q3 outcomes after the market closes. Here’s a preview of the important thing numbers and storylines to observe.
Core earnings estimates: Analysts anticipate Microsoft to report income of about $81.4 billion, up 16% from a yr in the past, and earnings of $4.06 per share, up 17%, according to Yahoo Finance. Microsoft has crushed Wall Street’s estimates 4 quarters in a row.
Cloud expectations: Microsoft has mentioned it expects Azure to develop 37% to 38% in fixed foreign money (adjusted for fluctuations in trade charges) in Q3. That can be a slight slowdown from the 38% it posted in Q2. Last time, Azure beat Microsoft’s personal forecast however fell wanting what analysts have been privately anticipating, a main issue within the historic inventory plunge.
But the Azure quantity doesn’t inform the total story. CFO Amy Hood mentioned on the last earnings call that if Microsoft had allotted all of the GPUs it introduced on-line in Q1 and Q2 solely to Azure (i.e., the corporate’s cloud clients), the expansion charge would have been over 40%.
Instead, the corporate break up that capability throughout Azure and its personal merchandise and operations, together with Copilot, GitHub Copilot, and inside R&D. That means Azure progress is as a lot a reflection of how Microsoft chooses to allocate its assets as it’s a measure of demand.
A leaner Microsoft: Even in simply the previous few months, Microsoft has moved to chop prices and streamline its operations even because it continues to spend aggressively on AI infrastructure — making an attempt to display to Wall Street that it’s staying disciplined on working bills.
- The firm offered voluntary retirement to hundreds of workers for the primary time in its 51-year historical past, concentrating on employees whose age plus years of service complete 70 or extra. Hood is anticipated to debate the monetary particulars of this system on the earnings name.
- It flattened its management layers and overhauled its compensation construction, decreasing the variety of pay factors from 9 to 5 and decoupling inventory awards from bonuses.
- Cloud and gross sales groups have been put underneath spending and hiring freezes.
- Several senior execs introduced their retirement, together with Experiences and Devices chief Rajesh Jha, Developer Division chief Julia Liuson, and Xbox chief Phil Spencer.
Capital spending: Microsoft is on tempo to spend greater than $100 billion on infrastructure in fiscal 2026, up from $88.7 billion the yr earlier than, mirroring spending surges throughout Big Tech. About two-thirds goes to GPUs and different {hardware} for AI and cloud workloads.
Hood mentioned capex spending would come down from the Q2 determine of $37.5 billion within the final quarter, however it is going to nonetheless be far above the corporate’s historic ranges. Investors might be looking forward to any sign about whether or not the tempo of spending is ready to proceed, stage off, or speed up.
Copilot and AI monetization: Microsoft disclosed in January that its Copilot product had reached 15 million paid seats, roughly 3.3% of the Microsoft 365 industrial base of about 450 million, which has since been cited repeatedly for instance of the corporate falling brief.
At $30 per consumer monthly, Copilot represents a massive income alternative if adoption accelerates, and any new disclosures about general utilization will make massive headlines. If the corporate doesn’t disclose this quantity within the new report, it could possibly be telling, as nicely.
Microsoft’s contracted future income greater than doubled to $625 billion final quarter, however about 45% of that was tied to OpenAI, because of the corporate’s renegotiated partnership with the ChatGPT maker, elevating questions on danger of a lot income related to 1 firm.
William Blair analyst Jason Ader famous after final quarter that Microsoft’s contracted future income nonetheless grew 28% after stripping out OpenAI, and that new contract signings surged 228%.
Microsoft CEO Satya Nadella additionally launched a new metric final quarter: “tokens per watt per dollar,” a measure of how a lot AI output the corporate gets for every unit of vitality and capital it invests. He didn’t give an overarching quantity, however for instance, Nadella mentioned Microsoft was capable of course of 50% extra OpenAI workload on the identical quantity of infrastructure as earlier than.
The greater image: Not everyone seems to be pessimistic. Wedbush analyst Dan Ives, in two notes to purchasers final week, argued that the market is underestimating cloud progress and that fears about OpenAI and Anthropic displacing the massive cloud suppliers are overblown.
Ives pointed to greater than $650 billion in mixed AI infrastructure spending from Microsoft, Google, Amazon, and Meta in 2026, and estimated $3 trillion in enterprise and authorities AI spending over the following three years. He known as the current sell-off a shopping for alternative.
ServiceNow, a main enterprise software program firm, noticed its inventory drop 17% on its own quarterly results last week, a signal that enterprise expertise spending could also be softer than anticipated.
But Intel surged more than 20% after robust earnings, pushed by a 22% leap in information heart and AI income, a signal that demand for the computing infrastructure behind AI is broad-based.
Earnings avalanche: Amazon, Google, and Meta all report the identical afternoon as Microsoft, which suggests traders might be evaluating Azure, AWS, and Google Cloud progress in actual time.
Check again Wednesday afternoon for protection.
