Microsoft Q2 Revenue Rises 16.8% Yet Shares Fall 10% on Power Constraints
Microsoft’s Q2 FY2026 revenue rose 16.8% and EPS climbed 24% YoY, driven by 39% Azure growth yet hampered by power-grid constraints that have left AI chips idle. Shares plunged nearly 10%—its largest one-day drop since late January—and now trade roughly 10% below peers on a 28.2 P/E.
1. Stock Slide Despite Earnings Beat
On January 29, Microsoft shares fell nearly 10% in a single trading session despite the company reporting Q2 FY2026 results that beat consensus estimates. Investors reacted negatively to management’s characterization of Azure revenue growth as “stabilizing,” which fell just shy of the 40% year-over-year pace many had expected. The sharp pullback wiped out roughly $350 billion in market capitalization and represents one of the largest one-day declines in Microsoft’s history, prompting renewed debate over whether this pullback creates a buying opportunity for long-term shareholders.
2. Q2 Financial Highlights
Microsoft delivered Q2 revenue of $65.8 billion, up 16.8% from a year earlier, driven by 24% growth in diluted EPS to $2.94. The company’s cloud division—comprising Azure, Office 365 Commercial and LinkedIn—generated $29.5 billion in revenue, a 39% increase compared to Q2 of FY2025. Management also disclosed a backlog of $625 billion in enterprise commitments, roughly 45% of which is linked to AI workloads powered through its partnership with OpenAI. These strong top-line and margin improvements exceeded consensus forecasts by 120 basis points on revenue growth and 200 basis points on EPS.
3. Azure Growth and Infrastructure Constraints
While Azure continues to outpace the overall cloud market, executives warned that electrical power limitations at certain data-center regions have led to delayed deployment of recently procured AI accelerators. Satya Nadella confirmed that some next-generation GPUs are “sitting in inventory” because regional utilities have not completed the infrastructure upgrades required to support the increased power density. The company expects these capacity constraints to persist through the end of its fiscal year in June, potentially capping incremental Azure growth until grid upgrades are finalized.
4. Valuation and Investor Outlook
Following the stock’s recent decline, Microsoft now trades at a forward P/E multiple of approximately 28.2, roughly 10% below the average multiple of its large-cap cloud peers. Analysts point to its durable free cash flow generation—projected at over $70 billion for FY2026—and its leading position in enterprise AI services as reasons for optimism. However, investors remain cautious until the company demonstrates a return to acceleration in Azure growth and confirms that backlog conversion tied to OpenAI commitments will materialize as paid revenue on a predictable timetable.