Microsoft shares declined by 3.5% on Thursday, extending a sell-off that began late last week following its Q2 earnings release. The slide accelerated despite no new company announcements, reflecting a broader market reassessment of technology valuations. This pullback follows an even steeper 14% drop immediately after the quarter, driven by investor concerns over margin compression and capital expenditures on artificial intelligence infrastructure.

In Q2, Microsoft’s cloud division generated a record $51.5 billion in revenue, up 19% year-over-year, yet investors focused on rising costs for data-center capacity and AI-related spending. While top-line beats were solid, operating expenses in the Intelligent Cloud segment surged by 23%, weighing on gross margins which contracted by 120 basis points to 67.8%. Management reiterated plans to expand AI server deployments, but stopped short of providing a precise timeline for when these investments will translate into margin improvement.

Stifel Nicolaus lowered its rating on Microsoft from Buy to Hold, setting a 12-month price target of 392, which implies a potential downside of approximately 5.36% from current levels. The firm cited cooling demand for incremental cloud capacity and the absence of near-term catalysts to justify a more cautious stance. Sanford C. Bernstein and Deutsche Bank have also trimmed targets, highlighting the risk that heavy AI capex could persist longer than anticipated and pressure free cash flow generation through fiscal 2027.

Microsoft’s Azure platform delivered 39% year-over-year growth, outpacing Street estimates of 37%, yet decelerating from the previous quarter’s 45% gain. Management attributes the slowdown to customers pacing new deployments while evaluating next-generation AI models. Long-term demand drivers remain intact, with over 95% of Fortune 500 companies now using Azure in some capacity, but investors are scrutinizing the near-term growth profile as cloud peers report similar expansion rates.