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Special Report
Microsoft Earnings Look Strong, But Investors Focus on RisksAuthored by Chris Markoch. Originally Published: 4/30/2026. 
Key Points
- Microsoft beat Q3 2026 earnings expectations, driven by 40% Azure growth and surging AI revenue.
- Rising CapEx and OpenAI concerns weighed on sentiment despite strong underlying fundamentals.
- Analysts still see significant upside for MSFT, suggesting the pullback may be a buying opportunity.
- Special Report: Elon Musk: This Could Turn $100 into $100,000
Earnings reports are like progress reports: investors must digest facts and make educated judgments about a company’s future. In the case of Microsoft Corp. (NASDAQ: MSFT), investors appear more concerned about future risks than they are impressed with solid present results. The highlights from the company’s Q3 2026 earnings report begin with a top- and bottom-line beat. Microsoft reported 40% growth in its Azure cloud computing segment, beating the high end of guidance. The company’s AI business is now generating $37 billion annually, a 123% year-over-year increase.
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Microsoft also said Copilot passed 20 million paid seats, up from 15 million in the prior quarter. That remains a small fraction of the company’s overall user base, but the sizable beat underscores momentum for a platform that’s ancillary to its core business. Despite those wins, MSFT fell roughly 5% the day after earnings. Investors are focused on two issues: the company’s capital expenditures and its relationship with OpenAI. Supply and Demand Are Driving Higher CapExMicrosoft said capital expenditures for the current quarter will exceed $40 billion, bringing the company’s full-year total to $190 billion. CEO Satya Nadella attributed about $25 billion (over 60%) of the quarterly total to higher component pricing for GPU and CPU hardware. Putting aside the implications for chipmakers such as Intel (NASDAQ: INTC), NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD), the increased spending is largely a function of basic supply and demand for GPUs and CPUs. It’s a cost of doing business, but Microsoft’s $37 billion in AI revenue shows that the spending is starting to deliver returns. A “Cloud” Over the OpenAI RelationshipIn Q2 2026, Microsoft reported a commercial backlog of $625 billion, a 110% year-over-year increase. In the most recent quarter, the company’s remaining performance obligation (RPO)—the closest proxy for backlog—was $627 billion. That represents roughly 99% year-over-year growth, but the sequential gain was nearly flat. Context matters: about 45% of the backlog stems from Microsoft’s relationship with OpenAI, including the $250 billion Azure commitment announced in October 2025. In February, OpenAI trimmed its projected compute spending for the coming years by more than 50%, from $1.4 trillion to $600 billion. That prompted some investors to question how solid Microsoft’s backlog really is. However, the recent restructured agreement between Microsoft and OpenAI should alleviate those concerns. Under the new terms, OpenAI products will still be prioritized for release on Azure, and Microsoft will remain OpenAI’s primary cloud provider. That means Microsoft’s share of OpenAI's business may be smaller than before, but the payment obligations to Microsoft will continue. The revised deal also helps Microsoft reduce cash outflows while maintaining inflows and lowering certain legal risks. Microsoft Is Still an Azure StoryEven excluding OpenAI entirely, Microsoft’s underlying RPO grew 26%, in line with historical norms and a sign that the core commercial business is compounding steadily on its own. More importantly, Azure growth reaccelerated to 40% this quarter after slipping to 38% in Q2, contradicting the thesis that Azure is entering structural deceleration. It also suggests the capacity constraints that weighed on Q2 are easing and that real enterprise demand—not just OpenAI commitments—is absorbing Microsoft’s cloud buildout. Psychology Is Winning Over FundamentalsThere was nothing materially wrong with Microsoft’s earnings report. A slightly lower Q4 revenue forecast and a modest slip in operating margin don’t fully explain a more than 5% drop in MSFT the day after earnings. What’s driving the move is a presumption that many things that can go wrong will go wrong: OpenAI revenue could dry up, Azure growth could slow, and the data center buildout could be called into question—leaving Microsoft with large cash outflows and a diminished return on that capital. Much of this stems from the persistent belief that an AI bubble exists, even when the company's earnings do not support that conclusion. So, should you buy MSFT at this level? Investors need to weigh the stock’s current valuation against the company’s fundamentals and earnings prospects. Trading at roughly 24x forward earnings and 10x sales, MSFT is not expensive relative to its history or to the premium typically afforded to blue-chip technology stocks. That valuation looks more attractive if analysts’ earnings estimates prove too conservative. Analysts largely maintained bullish ratings on Microsoft, although price targets moved lower the day after earnings. The consensus price target of $555.95 still implies about 37% upside for MSFT. That doesn’t make the stock a bargain-basement pick, but it does present an opportunity for long-term growth investors. Since hitting a 52-week low at the end of March, the stock has rallied, and the revised price targets do not suggest a return to recent lows is likely. For investors with a multi-quarter to multi-year horizon, this could be a reasonable entry point on an anticipated recovery. |
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