Commentary from Violeta Todorova, Senior Research Analyst at Leverage Shares & Income Shares, on Microsoft’s financial results
Microsoft’s fiscal second quarter results delivered a clear operational victory, but the Market reaction told a completely different story. Despite beating Wall Street expectations in both revenue and profit, Microsoft shares fell 10% on Thursday.
Investors fixated on two familiar concerns: the slowing growth of the Azure cloud and the rapidly increasing costs for building the AI infrastructure. The results highlight a growing tension at the core of Microsoft’s investment case. The company is rapidly scaling one of the world’s largest commercial AI platforms, but is doing so at a cost that is beginning to test investors’ patience.
For the quarter ended December 31, Microsoft reported adjusted earnings per share of $4.14, which well above consensus estimates of around 3.92 USD. Sales reached $81.3 billion, also exceeding expectations and recording a Growth of 17% compared to the previous yearr.
Unmistakable: Microsoft Office
The Cloud revenue was the outstanding factor. Microsoft cloud sales rose 26% to $51.5 billion, surpassing the $50 billion mark for the first time in the company’s history. In absolute terms, values were strong across most business areas, supporting Microsoft’s position as one of the most profitable and broadly positioned software companies consolidated worldwide. But for investors, beating the numbers predicted in the headlines wasn’t enough.
Azure growth: strong, but not strong enough
The market’s disappointment was focused on Azure. Revenue from Azure and other cloud services grew Year-on-year up 39%, which was slightly below the previous quarter and just below investors’ expectations used to constant acceleration were. While the number was broadly in line with analysts’ forecasts, it failed to inspire confidence that cloud growth is accelerating again at a time when AI demand is exploding.
This discrepancy explains the sharp sell-off. Microsoft is valued not just as a mature enterprise software provider, but as a long-term AI growth stock. Therefore can even a slight slowdown of Azure growth trigger a strong reaction.
AI demand is real, but capacity remains a barrier
Demand for Microsoft’s AI services continues to outstrip supply. The company acknowledged ongoing AI capacity bottleneckswhat the short term Effectively caps sales growth. Customer appetite for AI workloads is outpacing Microsoft’s ability to deploy data centers and GPUs fast enough, which the company said forces into an aggressive investment cycle.
Microsoft is also an active issuer of numerous bonds
These investments were clearly evident in the quarter. Capital expenditure (Capex) rose to $37.5 billion from $22.6 billion a year ago, well above consensus estimates. This marks the Highest quarterly infrastructure spending in Microsoft history.
One of the most closely watched metrics in the quarter was remaining performance obligations, which rose to $625 billion – up 110% year-over-year. 45% of this order backlog is on Commitments related to OpenAI tied, illustrating both the scale of Microsoft’s AI opportunity and the embedded concentration risk. […]
Margins under pressure
Die Gross margin of Microsoft narrowed to just over 68%, the lowest level in three yearsreflecting higher depreciation and AI-related costs. For the third quarter, the group forecasts an operating margin of around 45.1%, which is slightly below expectations. The message was clear: Margins are sacrificed in the short termto fund AI capacity, talent and computing power. But investors are demanding clearer evidence that the investments will turn into sustainable, highly profitable sources of income.
One bright spot was the adoption of Microsoft 365 Copilot. The company announced for the first time that it now has over 15 million paid Copilot users, with a total of more than 450 million paid commercial Microsoft 365 users. Although it’s still early, this proves that Microsoft can monetize AI at the application layer, not just through the infrastructure. If the Copilot penetration continues to increase, this could significantly increase revenue per user and help offset the capital intensity of AI infrastructure over time. […]
Reasons for decline in shares
The selloff was less about what Microsoft reported and more about what it implied. Investors are struggling with a compromise: massive short-term capital spending versus long-term AI dominance. With capital spending rising faster than revenue and margins under pressure, the market demands patience at a time when alternatives – particularly competitors with clearer near-term AI leverage – are performing better.
The contrast is clear: While Microsoft shares lagged last year, Competitors like Google have risen sharplydriven by excitement about next-generation AI models and perceived efficiency benefits.
Microsoft’s second quarter results confirmed that the company remains a cash-generating powerhouse with unmatched enterprise reach and a leadership position in AI infrastructure. The demand is real, the order backlog is enormous, and the first signs of AI monetization are emerging. What unsettled investors wasn’t the execution, but the scale. The sheer size of Microsoft’s AI investment cycle has shifted the debate from growth to returns.
Microsoft and SAP were recently punished, Alphabet (Google) far ahead
In the near term, volatility could continue as the market reflects slowing Azure growth and the increased capital expenditure. In the long term, however, Microsoft’s willingness to spend aggressively could solidify its position as one of the few companies that capable of running AI on a true industrial scale. The question is no longer whether Microsoft can build the future of AI, but rather how much investors are willing to pay while it does so. […]
Violeta Todorova, Leverage Shares
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