Microsoft Earnings Preview: High CapEx Growth Should Not Scare Investors Away

$Microsoft(MSFT)$   will announce its FY2026 Q2 earnings report after the market closes on January 28th. 

At the time of the last earnings release, Microsoft's capital expenditures triggered market concerns, causing the stock price to fall by 2.92% despite the accelerating earnings growth. Meanwhile, Microsoft's cloud business remains a key focus for investors.

Core Financial Indicators

– Microsoft's revenue is expected to be USD 80.26B for FY2026Q2, up 15.26% YOY;

– EPS is estimated to be USD 3.87, up 19.82% YOY.

Microsoft's CapEx Rhythm Can Easily Confuse Investors

Microsoft significantly slowed down its self-built data center expansion plans in 2025, including temporarily halting the construction capacity of numerous proprietary data centers and canceling certain leasing plans. This shift deviated from its original position as OpenAI's core computing power supplier. This strategic change led large AI clients like OpenAI to turn to alternative computing power providers such as Oracle and CoreWeave.

At the time, Microsoft made this decision because it believed the profit margins for the business model of "buying GPUs and leasing them to customers" were limited. However, Microsoft indeed underestimated the subsequent demand for AI computing power, so it has significantly accelerated its CapEx since last quarter. The instability in capital expenditure growth led to a market sell-off of Microsoft stock following its last earnings report.

Microsoft Itself Is Slowly Reducing Its Dependence on OpenAI...

In fact, Microsoft simply views AI as an amplifier for its Office and developer tool Github businesses. (For Office's AI features, users generally don't particularly care which underlying large language model is used.) Microsoft merely treats large language models as a tool, resulting in limited interest in developing its own large language models, and instead focuses more on commercialization results. 

This approach differs greatly from Google's strategy of insisting on self-developing large language models and launching Gemini; it also significantly differs from Amazon's strategy of providing underlying computing power.

Segments to Watch

Expected growth rates for each business segment are as follows:

Productivity & Business Processes

Benefiting from AI capabilities, Microsoft's Productivity & Business Processes have seen increased growth in recent quarters. The segment includes Office 365 (Commercial and Consumer), Dynamics 365 for CRM, Microsoft Teams, and Skype for Business.

This segment reported revenue of $33.02 billion in the previous quarter, a 16.61% increase year-over-year. 

The company previously provided guidance, expecting the segment's FY2026 Q2 revenue to be between $33.3-33.6 billion, corresponding to a year-over-year growth of 13.3%-14.3%. However, Microsoft has consistently tended to provide conservative earnings guidance.

Intelligent Cloud Business

Microsoft's Intelligent Cloud segment includes server products and cloud services (such as Azure), along with enterprise and partner services. 

Market attention is still primarily on Azure's growth. Last quarter's financial report showed Azure up 39% year over year. The market expects Azure's year-over-year growth to be +35.9% (which may be an underestimate) in the upcoming earnings report. The overall Intelligent Cloud segment is expected to grow 28.3%, compared with 25.6% year-over-year in the previous quarter.

Microsoft's remaining performance obligations rose to $392 billion in FY2026 Q1, an increase of 51.4% year over year, with most tied to cloud services. This backlog provides visibility and support for Azure's future growth.

More Personal Computing

The More Personal Computing segment, encompassing Windows OEM licensing, devices, gaming, Microsoft Edge, and search and news advertising, is projected to experience flat revenue growth.

The ongoing softness in the PC market is likely to continue impacting the revenue from Windows operating systems and devices this quarter. However, this sector has not been a primary focus for investors recently.

Option Market Signals

The current Put/Call Ratio for Microsoft is 0.67. Microsoft's implied volatility is lower than that of other major tech stocks during earnings season, currently at 31.84%.

Summary of Risks and Opportunities

– Potential Positive Catalysts: Azure growth; AI demand 

– Risks to Monitor: The risk of excessive CapEx; Intensifying competition in cloud services

– Valuation:

Microsoft's P/E ratio stands at 33.14x, placing it in the 32th percentile of its five-year range—significantly below its 92th-percentile level three months ago.

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