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Special Report
Microsoft Earnings Look Strong, But Investors Focus on RisksAuthored by Chris Markoch. First 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: Have $500? Invest in Elon’s AI Masterplan
Earnings reports are like progress reports: they require investors to digest facts and make educated guesses about a company's future prospects. In Microsoft’s case, investors are more focused on future risks than on solid current results. The company’s Q3 2026 earnings report featured both top- and bottom-line beats. Azure grew 40% — above the high end of guidance — and Microsoft's AI business now generates $37 billion annually, a 123% year-over-year increase.
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Copilot passed 20 million paid seats, up from 15 million the prior quarter. While still a small fraction of Microsoft's overall user base, the sizable beat indicates momentum for a platform ancillary to its core business. However, MSFT fell about 5% the day after earnings as investors focused on two issues: elevated capital expenditures and Microsoft’s relationship with OpenAI. The Basics of Supply and Demand Are Raising CapEx PlansMicrosoft announced capital expenditures for the current quarter would exceed $40 billion, bringing the full-year total to $190 billion. CEO Satya Nadella said about $25 billion — over 60% of the quarterly total — reflects higher component prices for GPUs and CPUs. Putting aside the implications for a company like Intel (NASDAQ: INTC) and chipmakers such as NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD), the increased spending is driven largely by simple supply-and-demand dynamics. That's a cost of doing business, but as Microsoft's $37 billion in AI revenue shows, it's a cost that is starting to deliver a return. A “Cloud” Over the OpenAI RelationshipIn Q2 2026 (reported in January), Microsoft said its commercial backlog was $625 billion, up 110% year over year. In the most recent quarter, remaining performance obligation (RPO) — the closest proxy for backlog — stood at $627 billion, up 99% YOY but essentially flat sequentially. Context matters: about 45% of the backlog stems from Microsoft’s relationship with OpenAI, including the $250 billion Azure commitment announced in October 2025. However, in February OpenAI cut its compute spending forecast for the coming years by more than 50%, from $1.4 trillion to $600 billion, prompting some investors to question the solidity of Microsoft’s backlog. The recent restructured agreement between Microsoft and OpenAI should allay those concerns. Under the new terms, OpenAI products remain prioritized for release on Azure, and Microsoft will continue to be OpenAI’s primary cloud provider. While Microsoft's share of OpenAI's business will be below 100%, existing payment obligations remain. The restructured deal reduces Microsoft's cash outflows, preserves inflows and lowers legal risk. Microsoft Is Still an Azure StoryExcluding OpenAI, Microsoft's underlying RPO grew 26%, in line with historical norms and indicating the core commercial business continues to compound on its own. Importantly, Azure growth re-accelerated to 40% after slipping to 38% in Q2, contradicting the thesis that Azure is structurally decelerating. It also suggests 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. A slightly lower Q4 revenue guide and a small slip in operating margin don't justify a post-earnings drop of over 5%. The selloff reflects a presumption that many things that can go wrong will — for example, OpenAI revenue drying up, slowing Azure growth, and casting doubt on the data-center buildout — leaving Microsoft with less return on the cash it's deploying. But those fears rest on the persistent belief in an AI bubble, a view not supported by the actual earnings results. So, should you buy MSFT at this level? To answer that, investors must consider the stock's current valuation alongside the company's earnings outlook. Trading around 24x forward earnings and 10x sales, MSFT isn't expensive relative to its history or the premium typically given to blue-chip technology stocks — especially if earnings estimates prove too low. Analysts remain bullish but trimmed price targets after earnings. The consensus price target of $555.95 implies about 37% upside, suggesting a solid long-term opportunity rather than a bargain-basement stock. That said, price targets were lowered the day after earnings (more on that here). Since a 52-week low at the end of March, the stock has rallied, and the revised targets don't imply a return to those lows. That makes this a reasonable entry point for investors expecting a recovery in the coming weeks. |
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