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Exclusive Story
Microsoft Earnings Look Strong, But Investors Focus on RisksAuthor: Chris Markoch. 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 already made me a “wealthy man”
Earnings reports are like progress reports: they require investors to digest facts and make informed judgments about a company's future prospects. In the case of Microsoft Corp. (NASDAQ: MSFT), investors appear more focused on future risks than on the solid results the company reported. Highlights from the company’s Q3 2026 earnings report include top- and bottom-line beats. Azure grew 40%, topping the high end of guidance, and Microsoft’s AI business is now generating $37 billion annually — a 123% year-over-year (YOY) increase.
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Microsoft also reported that Copilot passed 20 million paid seats, up from 15 million in the prior quarter. That still represents a small fraction of Microsoft’s total user base, but the sizable beat indicates strong momentum for a platform that is ancillary to its core business. Despite the results, MSFT shares fell about 5% the day after the report. Investors are focused on two key issues: the company’s capital expenditures and its relationship with OpenAI. The Basics of Supply and Demand Are Raising CapEx PlansMicrosoft said capital expenditures in the current fiscal quarter would exceed $40 billion, bringing the company’s full-year total to $190 billion. CEO Satya Nadella said roughly $25 billion (over 60% of the quarterly total) is attributable to higher component pricing for GPU and CPU hardware. Aside from what that has meant for companies such as Intel (NASDAQ: INTC) and what it likely implies for chipmakers like NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD), the increased spending largely reflects straightforward supply-and-demand dynamics. That is a cost of doing business, but as Microsoft’s $37 billion in AI revenue shows, it is a cost that is beginning to deliver a return. A “Cloud” Over the OpenAI RelationshipIn its Q2 2026 earnings report, released in January, Microsoft disclosed a commercial backlog of $625 billion, a 110% YOY increase. In the most recent quarter, the company’s remaining performance obligation (RPO) — the closest proxy for backlog — was $627 billion. That's still 99% YOY growth, but the sequential gain was nearly flat. Context matters: roughly 45% of the backlog stems from the company’s relationship with OpenAI, including a $250 billion Azure commitment announced in October 2025. In February, OpenAI cut its compute-spending budget 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 ease those concerns. Under the new terms, OpenAI products will continue to be prioritized for release on Azure, and Microsoft remains OpenAI’s primary cloud provider. While Microsoft’s share of OpenAI’s business may be less than 100%, existing payment obligations to Microsoft remain. The restructured deal helps Microsoft reduce cash outflows while preserving cash inflows and lowering certain legal risks. Microsoft Is Still an Azure StoryEven excluding OpenAI, Microsoft’s underlying RPO grew 26%. That is broadly in line with historical norms and suggests Microsoft’s core commercial business is compounding steadily on its own. Importantly, Azure growth re-accelerated to 40% this quarter after slipping to 38% in Q2, contradicting the bear thesis that Azure is entering a period of structural deceleration. It also suggests the capacity constraints that weighed on Q2 are easing, and that genuine 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: a slightly lower Q4 revenue forecast and a modest slip in operating margin do not fully explain a more than 5% drop in MSFT the day after the report. The selloff reflects the assumption that many things that can go wrong will — from OpenAI revenue drying up, to slowing Azure growth, to questioning the entire data center buildout and the returns on the cash being spent. That narrative rests on the belief that an AI bubble is imminent, even though the company’s earnings do not support such an extreme outcome. So, should you buy MSFT at this level? Investors need to weigh the stock’s current valuation against the company’s earnings trajectory. Trading at roughly 24x forward earnings and 10x sales, MSFT is not expensive compared with its own history or the premium typically afforded to blue-chip technology stocks. That becomes especially compelling if projected earnings growth ends up being underestimated. Analysts remain broadly bullish on Microsoft, though many trimmed price targets after the report. The consensus price target of $555.95 still implies roughly 37% upside for MSFT. That is not a clearance sale, but it does present an opportunity for solid, long-term growth. Since hitting a 52-week low at the end of March, the stock has staged a strong rally, and nothing in the revised price targets suggests a return to those lows is warranted. For investors who believe Microsoft’s fundamentals and Azure momentum will persist, this looks like a reasonable entry point to participate in a potential recovery over the coming weeks and months. |
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