Microsoft just smashed earnings expectations with a historic $50 billion cloud milestone, yet its stock is in a freefall. As CEO Satya Nadella navigates “capacity constraints” and a $37 billion spending spree, investors are asking: is the AI payoff coming fast enough? With Google’s Gemini 3 surging ahead, the battle for tech supremacy has reached a tipping point. WATCH the breakdown of the numbers that have Wall Street on edge.
The tech giant’s cloud revenue surpassed $50 billion for the first time, yet a massive 11% stock dip reflects growing anxiety over ballooning capital expenditures and competitive pressure from Google.
Microsoft (MSFT) announced its second quarter financial results after the market close on Wednesday, surpassing Wall Street projections on both top and bottom lines, with cloud income exceeding $50 billion for the first time.
However, the corporation’s equity retreated over 11% Thursday as stakeholders expressed concern about that cloud expansion decelerating—and about the firm’s expanding AI-fueled expenditures. “We are only at the introductory stages of AI expansion, and already Microsoft has established an AI enterprise that is greater than some of our most significant franchises,” CEO Satya Nadella remarked in a statement.
The AI Valuation Gap
Microsoft stands as one of the primary recipients of the AI surge, owing to its early stakes in ChatGPT creator OpenAI, driving its valuation above the $4 trillion threshold in July. Nevertheless, it has retreated from those peaks as financiers continue to raise alarms regarding the AI sector’s massive outlays. At the conclusion of January 29, the stock sat at 433.50, a decline of approximately 9.99%.
In Q2, earnings per share (EPS) of $5.16 on total revenue of $81.27 billion exceeded the $3.92 and $80.3 billion Wall Street was anticipating. Microsoft Cloud revenue reached $51.5 billion, slightly ahead of an anticipated $51.2 billion. The company announced Cloud revenue of $40.9 billion in the corresponding period last year.
Segment Performance and Capacity Constraints
The Productivity and Business Processes segment, which encompasses income from Microsoft 365 Commercial and Consumer Cloud, reached $34.1 billion, while Wall Street was expecting $33.6 billion. CEO Satya Nadella recently highlighted these developments during the World Economic Forum in Davos on January 21, 2026.
The firm’s Intelligent Cloud division, which includes Azure sales, generated $32.9 billion, surpassing projections of $32.2 billion. “Perhaps it wasn’t elevated enough for individuals who desired a higher figure,” RBC Capital Markets managing director Rishi Jaluria noted. Remaining performance obligations (RPO), the value of unpaid customer contracts, hit $625 billion, with 45% of that stemming from OpenAI commitments—a vital metric for evaluating overall AI demand.
Microsoft continues to encounter AI capacity limits, meaning user demand for AI is outstripping Microsoft’s ability to provide it, placing an artificial ceiling on the tech giant’s revenue. Consequently, the company is allocating billions more into capital outlays, which reached $37.5 billion this quarter, up from $22.6 billion in the second quarter of 2025. The More Personal Computing business, consisting of Surface and Xbox products along with Windows software, yielded $14.3 billion, matching expectations.
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The Competitive Landscape
Microsoft’s share price is currently down over the last year, trailing cloud competitor Amazon (AMZN). Both firms, however, are being outpaced by Google’s (GOOG) stock, which is up a remarkable 69% over the past 12 months. Much of that surge is linked to the introduction of Google’s Gemini 3, which positioned the firm as the AI model frontrunner ahead of Microsoft partner OpenAI and its ChatGPT.
