Microsoft (MSFT.US) shares have experienced volatile performance so far in 2026. From the start of the year through the end of March, the stock declined by nearly a quarter, but has since rebounded by approximately 15%. As of the market close last Friday, Microsoft's stock is down 12% year-to-date. The pressure on the share price this year largely stems from investor concerns over two key issues: the company's substantial capital expenditure plans and the potential for slowing growth in its Azure cloud business. Consequently, Microsoft's upcoming Q3 fiscal year 2026 earnings report, scheduled for release after the market closes on April 29, represents a critical test for the stock. This latest financial report will not only determine if Microsoft can alleviate investor worries but will also provide a significant window for observing the broader artificial intelligence (AI) landscape.
Wall Street analysts generally anticipate Microsoft's Q3 revenue to increase by 16% year-over-year to $814.2 billion, with adjusted earnings per share expected to be $4.07.
What will investors be watching? Investors are primarily seeking evidence that Microsoft's aggressive investment in AI is translating into substantial revenue. Generating profit has never been a core problem for Microsoft—last quarter's revenue reached $813 billion, a 17% increase year-over-year—but market concerns center on whether expenditure growth is outpacing profit growth. Investors will scrutinize the level of capital expenditure Microsoft plans for the coming quarter or quarters. There may not be an absolute figure that is considered "too high," as the key factor is whether current investments are effectively converting into revenue. If the conversion is effective, investors are likely to be more forgiving.
Simultaneously, Azure's growth performance remains a major focus. In fiscal Q2 2026, revenue from Azure and other cloud services (on a constant currency basis) grew 38% year-over-year, just meeting analyst expectations, but the growth rate decelerated by one percentage point compared to the previous quarter. This slight deceleration in Azure revenue growth was interpreted by the market as a signal that the AI-driven cloud growth narrative might be facing volatility, disappointing investors betting on more robust expansion.
Furthermore, although Microsoft's total remaining performance obligation (RPO) reached $625 billion in Q2, when excluding OpenAI-related commitments, its RPO growth was the lowest among the three major cloud providers (Azure, Google Cloud, and Amazon Web Services).
On a positive note, Azure's Q3 performance might exceed expectations and could potentially accelerate in subsequent quarters. After all, Microsoft's Q2 report indicated that demand for computing power continues to outstrip supply, with capacity constraints being the primary limiting factor. To address AI compute shortages, Microsoft has undertaken several initiatives. Last year, the company signed agreements worth over $60 billion with new cloud service providers like Nebius (NBIS.US), CoreWeave (CRWV.US), Nscale, and Lambda to secure external computing capacity. Earlier this month, Microsoft also announced an expansion of its partnership with Nscale to further boost its computational reserves in the future. By leveraging external partnerships, Microsoft can rapidly scale Azure's compute capacity without building data centers from scratch. If the Q3 report shows that this new capacity is coming online, it would suggest that bottleneck pressures are easing, potentially removing a major overhang on cloud business growth and the stock price.
The M365 business also warrants attention. In recent years, investors have become accustomed to focusing on Azure's growth figures each quarter. Generally, if Azure growth exceeds expectations and guidance is above consensus, the stock price rises, and vice-versa. While there are some concerns about Azure's growth trajectory, the underlying demand for cloud services remains robust, so the issue may not be severe. In contrast, significant questions currently surround M365 and Copilot. The primary concern is AI adoption rates. Microsoft has stated that there are currently "only" 15 million Copilot for enterprise seats, representing roughly 3% of its user base. In comparison, Gemini Enterprise AI reportedly has over 8 million users, indicating a notably higher penetration rate. Growth in Copilot for enterprise seats has slowed significantly in recent quarters, now down to 6%. M365 commercial revenue growth is also decelerating, reaching just 14% last quarter. While a 14% growth rate is not poor, the issue lies in intensifying competition within the enterprise market. Competitors like Anthropic are experiencing exponential growth, and OpenAI is making significant strides, creating a risk that Microsoft could face slower growth and market share erosion.
It is important to note that Microsoft's upcoming earnings report will also provide an internal perspective on the AI ecosystem. Microsoft is deeply involved in three key stages of the AI value chain: infrastructure, cloud computing, and software applications. From an infrastructure standpoint, Microsoft's current and future spending plans directly impact market expectations for NVIDIA (NVDA.US), as Microsoft is its largest customer. If Microsoft maintains ambitious expenditure plans, it signals sustained strong demand for AI chips. Conversely, any reduction might suggest the infrastructure build-out phase is plateauing. The market appears to have entered a new phase where investors are less focused on what AI *can do* and more concerned with how it *generates revenue*. Microsoft's deep involvement in both the infrastructure phase (the core driver of AI development in recent years) and the application monetization phase (the current focus for enterprises), combined with its massive scale, places it squarely in the spotlight. If Microsoft can demonstrate that this transition is occurring profitably, it would serve as a crucial "proof of concept" for the entire tech sector.
Wall Street maintains a broadly optimistic view. Microsoft currently faces multiple challenges: significantly increased capital expenditures, compute constraints potentially limiting cloud growth, and the fact that nearly 45% of its commercial bookings are tied to OpenAI, which shows no near-term profitability and presents long-term partnership risks. Additionally, escalating geopolitical conflicts heighten global recession fears, posing further risks to Microsoft's business.
While some investors view any pullback in a high-quality company like Microsoft as a clear "green light" to buy, some analysts caution that Microsoft's perceived disadvantages compared to Alphabet (GOOG.US), Amazon.com (AMZN.US), or Anthropic suggest it may not be an automatic "buy." These disadvantages include the lack of a competitive proprietary chip, the absence of a foundational in-house large language model, and difficulties in balancing compute allocation between Azure and other internal needs. Specifically, lacking proprietary chips means that for the same level of capital expenditure, Microsoft potentially gains less compute capacity than Amazon or Alphabet. Not having a foundational model may give OpenAI, Anthropic, and Alphabet an edge in AI product development. The compute allocation issue harms the Azure brand, as customers might perceive they are not the top priority, with new compute resources being directed towards Copilot (which has slower revenue realization) and internal model development rather than the high-return Azure business. Microsoft management has responded by stating that if all newly available GPUs were allocated to Azure, its growth rate would certainly exceed 40%, but the company must also support high-margin businesses like M365 and Copilot, alongside internal R&D needs for its own models.
Despite these concerns, Wall Street analysts overall maintain a highly bullish stance. Among the analysts covering Microsoft, 15 rate the stock a "Buy," while only one recommends "Neutral." The average price target is approximately $583, implying nearly 40% upside and suggesting the stock could fully recover its losses and reach new highs within twelve months. The market anticipates Microsoft's stock could reach multi-month highs following the earnings release. Options pricing indicates traders expect the stock to move up to 6% in either direction by the end of the week. A move of that magnitude to the upside from last Friday's close would bring the stock near $450, which would be its highest level since the late-January earnings report that triggered concerns over AI spending and OpenAI exposure. A downward move to the lower end of the range could see the stock fall to around $391, erasing some of the gains from the recent tech sector rally.
Morgan Stanley recently reiterated its support for Microsoft, maintaining an "Overweight" rating with a $650 price target. Analyst Keith Weiss stated in a client note, "Microsoft demonstrated strong commercial demand at the end of fiscal Q2 2026, but investor focus remains on supply constraints and GPU allocation limiting Azure growth, alongside growing concerns about Copilot's competitive position versus AI Labs. Last quarter, Microsoft achieved double-digit revenue growth and expanded operating margins. Its commercial product portfolio should maintain strong momentum. Looking to fiscal Q3 2026, Azure growth remains dependent on capacity availability rather than demand. Meanwhile, Microsoft continues to invest heavily in AI infrastructure, with capital expenditure focused on short-term, revenue-generating assets like GPUs/CPUs." Weiss added that an Azure growth rate around 39% would be "clearly viewed" positively, especially considering he believes it is achievable. He also noted, "Improvements to Copilot products should boost sentiment and maintain growth momentum, building on the key metric of 15 million new paid Copilot users last quarter as Microsoft expands its user base." The analyst also highlighted that beyond Azure capacity (which Microsoft allocates to both internal and external users), other factors to watch include gross margins, operating margins, and the degree of resource tightness in Azure.
Goldman Sachs also maintains a bullish outlook on Microsoft, with a "Buy" rating. Analyst Gabriela Borges noted that since Microsoft's last earnings report, the stock has underperformed due to concerns over high capital expenditure and Azure's competitive dynamics. However, she suggested that the current trading level appears to reflect most cautious factors. Borges added that Azure has maintained a robust growth rate above 30% even amidst compute constraints and management's focus on internal AI workloads. Furthermore, while the surge in AI-driven capital expenditure has negatively impacted sentiment, it ultimately underscores Microsoft's significant long-term opportunity in cloud computing and AI.
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