The “Black Monday” market crash in October 1987, when the Dow plunged greater than 22%. The antitrust ruling towards Microsoft in April 2000, when a federal choose declared the corporate a monopolist. The Floor RT writedown in July 2013, when its $900 million wager on tablets went unhealthy. The COVID crash of March 2020, when the world shut down and the market fell off a cliff.
Now add to the record of Microsoft’s worst single-day inventory plunges: the corporate’s better-than-expected earnings for the second quarter of fiscal 2026, final Wednesday, Jan. 28.
Microsoft’s shares fell as a lot as 12% in buying and selling the day after the earnings report, earlier than closing at $433.50, down 10%, erasing $357 billion from its market worth.
It was the biggest single-day greenback loss in Microsoft’s historical past and the seventh-largest share decline because the firm went public in 1986. The final time Microsoft’s shares fell this a lot after an earnings report was that Floor RT debacle 13 years in the past. The inventory barely moved on Friday, leaving the huge losses intact going into the upcoming week.
On the floor, the quarter itself was robust. Income rose 17% to $81.3 billion. Adjusted earnings hit $4.14 per share, above the $3.91 consensus. Working margin was 47.1%. Microsoft Cloud income was greater than $50 billion for the primary time.
“Even in these early innings, we now have constructed an AI enterprise that’s bigger than a few of our greatest franchises that took a long time to construct,” Microsoft CEO Satya Nadella stated on the earnings name.
The issues behind the numbers
So what occurred? A number of components are taking part in out behind the scenes.
Microsoft’s Azure cloud platform grew 38% in fixed forex, forward of its personal forecast. However Wall Avenue’s “whisper quantity” was 39.4%, and that miss was sufficient to shake the market.
Capital spending soared to $37.5 billion within the quarter, up 66% from a yr in the past, illustrating the dimensions of the danger Microsoft is taking. The corporate is racing towards Amazon, Google, and others to construct knowledge facilities and purchase chips to compete in AI.
Microsoft 365 Copilot, the AI assistant that the corporate has constructed into its Workplace apps, has 15 million paid customers. That appears like rather a lot till you think about that Microsoft 365 has 450 million paid seats. Copilot has reached slightly greater than 3% of them.
Microsoft’s outlook for the upcoming quarter didn’t assist. Its forecast for the Home windows and Units enterprise was greater than $1 billion beneath what analysts anticipated, because the wave of PC upgrades sparked by Home windows 10’s finish of life runs its course and loses steam.
However the quantity that appeared to concern buyers most was this: 45% of Microsoft’s $625 billion in remaining efficiency obligations (RPO) is tied to OpenAI.
RPO represents contracts that prospects have signed however Microsoft has not but fulfilled. It’s a measure of future income already locked in. Microsoft’s report confirmed that roughly $281 billion of that backlog is dedicated to a single buyer, an organization that’s nonetheless burning money and looking for a sustainable enterprise mannequin.
The query is whether or not that funding will finally repay in demand from Microsoft’s enterprise prospects, not simply from OpenAI and different AI corporations.
In a submit earlier than earnings, Judson Althoff, CEO of Microsoft’s business enterprise, pointed to prospects utilizing AI to resolve actual issues: Epic producing 16 million affected person file summaries a month, Land O’Lakes constructing an assistant that turns an 800-page crop information into on the spot suggestions for farmers, Mercedes-Benz utilizing AI brokers to chop manufacturing unit problem analysis from days to minutes.
A ‘show it’ second
However analysts at UBS mirrored the broader market skepticism, as famous by CNBC. Though Microsoft 365 business income was up 16% within the quarter, to greater than $24.5 billion, that’s not due to Copilot, they stated, citing their checks with prospects.
“We predict Microsoft must ‘show’ that these are good investments,” they wrote.
Others have been extra optimistic. Morningstar maintained its $600 honest worth estimate for Microsoft, calling outcomes “in keeping with our long-term thesis.” The inventory, which closed Friday at $430, “stays one among our prime picks,” analyst Dan Romanoff wrote.
William Blair analyst Jason Ader titled report “A Lot to Like” and famous that demand for AI and cloud providers continues to outpace provide. The agency additionally pointed to accelerating enterprise adoption, observing that the variety of prospects with greater than 35,000 Copilot seats tripled year-over-year.
Wedbush analyst Dan Ives maintained an “Outperform” score however lowered his value goal to $575. He cited friction between long-term investments and short-term investor endurance.
“The Avenue needed to see much less cap-ex spending and quicker cloud/AI monetization,” Ives wrote, “and popping out of the gates it’s the alternative.” He described 2026 as an “inflection yr” for the corporate and known as the selloff a shopping for alternative.
Rick Sherlund has watched Microsoft undergo these plunges earlier than. The longtime Wall Avenue analyst, who began protecting the corporate when it went public, noticed in an look on CNBC that the market appeared to be in “a foul temper” final week.
Client AI instruments like ChatGPT get the eye, however companies really pay. The actual driver, Sherlund stated, might be agentic AI, the place software program brokers work together with enterprise programs and with one another, burning monumental computing cycles within the course of.
By way of demand, he stated, the enterprise AI market is “actually simply getting began.”
Judging from the market’s temper, Microsoft is not getting the advantage of the doubt.
