Earnings Preview | Huge capital expenditures and slowing Azure growth pressure Microsoft's stock price. Is Q3 performance a lifeline or another blow?

According to Zhitong Finance APP, Microsoft's (MSFT.US) stock price has experienced a rollercoaster ride in 2026. From the beginning of the year to the end of March, Microsoft's stock price fell by nearly a quarter, but since then it has rebounded by nearly 15%. As of last Friday's close of U.S. stocks, Microsoft's stock price has fallen 12% year-to-date.

The significant pressure on Microsoft's stock price this year largely stems from investors' concerns about two issues—its massive capital expenditure plan and the potential slowdown in growth of its cloud business, Azure. Therefore, Microsoft's upcoming third-quarter financial report for fiscal year 2026, to be released after U.S. market hours on April 29, will be a critical test for the stock. This latest financial report will not only determine whether Microsoft can alleviate investor concerns but will also provide an important window for investors to observe the broader artificial intelligence (AI) field. Currently, Wall Street analysts generally expect Microsoft's third-quarter revenue to grow by 16% year-over-year to $81.42 billion, with adjusted earnings per share of $4.07.

What Will Investors Be Watching?

Investors will first want to see whether Microsoft's significant investment in AI has translated into substantial revenue. Making money has never been a problem for Microsoft—its revenue in the last quarter reached $81.3 billion, a 17% year-over-year increase—but the market is concerned that the growth rate of expenditures is outpacing the growth rate of profits.

Investors will focus on how much capital expenditure Microsoft plans to invest in the coming quarter or quarters. There may not be an absolute "too high" number, as the key depends on whether the current investments effectively translate into revenue. If the conversion is effective, investors are likely to be more forgiving towards Microsoft.

At the same time, Azure's growth performance remains a key focus for investors. In the second quarter of fiscal year 2026, Azure and other cloud services revenue (at constant exchange rates) grew by 38% year-over-year, exactly matching analysts' expectations, but the growth rate slowed by one percentage point compared to the previous quarter. The "slight decline" in Azure's revenue growth has been interpreted by the market as a signal that the AI-driven cloud growth story may face volatility, disappointing investors betting on stronger growth for Microsoft's cloud business. Additionally, although Microsoft's total remaining performance obligations (RPO) reached $625 billion in the second quarter, excluding the OpenAI factor, its RPO growth was the lowest among the three major cloud giants (Azure, Google Cloud, Amazon AWS).

The good news is that Azure's performance in the third quarter may exceed expectations and is expected to accelerate growth in the coming quarters. After all, Microsoft's second-quarter financial report indicates that demand for computing power continues to exceed supply, with capacity constraints being the only issue.

In response to the challenge of AI computing power shortages, Microsoft has taken several measures. Last year, Microsoft signed agreements worth over $60 billion with new cloud service providers such as Nebius (NBIS.US), CoreWeave (CRWV.US), Nscale, and Lambda to acquire external computing power. Earlier this month, Microsoft also announced an expansion of its collaboration with Nscale to further enhance its computing reserves in the future. With external partnerships, Microsoft can quickly expand Azure's computing power without having to build data centers from scratch If the third-quarter financial report shows that new computing power is gradually being implemented, it means that the capacity bottleneck will continue to ease. This will also eliminate the biggest negative factor suppressing cloud business growth and dragging down Microsoft's stock price.

It is also worth mentioning the M365 business. In recent years, investors have become accustomed to focusing on Azure's growth data every quarter. Basically, as long as Azure's growth exceeds expectations and the guidance is higher than the market consensus, the stock price will rise, and vice versa. Although investors have some concerns about Azure's growth prospects, the demand for cloud services is very strong, so the issue is not that serious.

In contrast, investors currently have significant doubts about M365 and Copilot. The biggest issue is the AI adoption rate. Microsoft stated that there are currently "only" 15 million enterprise user seats for Copilot, which accounts for only about 3% of its user base—compared to this, Gemini Enterprise AI users have exceeded 8 million, with a significantly higher penetration rate. The growth of Copilot enterprise user seats has significantly slowed down in recent quarters, currently dropping to 6%. The growth rate of M365 commercial revenue is also declining, with only 14% last quarter.

A 14% growth rate may not be bad, but the problem is that competition in the enterprise market is intensifying. Anthropic is experiencing exponential growth in this market, and OpenAI is also making strides, while Microsoft is gradually facing an unfavorable situation of lagging growth and market share loss.

It is worth mentioning that Microsoft's upcoming financial report will also provide an internal perspective on observing the AI ecosystem. Microsoft is deeply involved in three key stages of the AI industry chain: infrastructure, cloud computing, and software applications. From an infrastructure perspective, Microsoft's current and future spending plans will directly impact market expectations for Nvidia, as Microsoft is its largest customer. If Microsoft maintains its ambitious spending plans, it means that demand for AI chips remains strong; but if it cuts spending plans, it may indicate that the AI infrastructure construction phase has reached a plateau.

The market seems to have entered a new phase—investors are more concerned about "how AI makes money" rather than "what AI can do." Microsoft's deep involvement in both the infrastructure phase (the core of AI development in recent years) and the application monetization phase (where enterprises are currently striving for commercialization), combined with its large scale, puts it in the market spotlight. If Microsoft can prove that this transformation is occurring profitably, it will become an important "proof of concept" for the entire technology industry.

Wall Street Remains Bullish

Microsoft is currently facing multiple challenges: a significant increase in capital expenditures, and computing power constraints may limit cloud business growth. At the same time, nearly 45% of Microsoft's commercial orders are deeply tied to OpenAI, which has no short-term profit prospects, and long-term cooperation carries hidden concerns. In addition, ongoing geopolitical conflicts and increasing global recession worries will also pose risks to Microsoft's business.

Although some investors believe that any stock price pullback of a high-quality company like Microsoft is a clear "green light" for active buying, some analysts point out that Microsoft's disadvantages in AI compared to Google, Amazon, or Anthropic may indicate that one cannot "buy Microsoft blindly." Analysts say that Microsoft's disadvantages compared to Google, Amazon, or Anthropic lie in its lack of competitive self-developed chips, absence of self-developed large models, and difficulty in balancing the computing power demands between Azure and Microsoft's other businesses.

Specifically, the lack of self-developed chips means that for the same scale of capital expenditure, Microsoft obtains less computing capacity than Amazon or Google; the absence of self-developed models means that OpenAI, Anthropic, and Google have an advantage in building AI products; and the issue of computing power allocation damages Azure's brand image, as customers find they are not prioritized.

Newly added computing power is prioritized for Copilot and self-developed large models, which show slower revenue growth, while Azure, which has the fastest investment return, is not being taken care of. Microsoft's management responded: "If we allocate all the newly launched GPUs to Azure, Azure's growth rate would definitely exceed 40%, but the company also needs to take care of high-margin businesses like M365 or Copilot and the research and development needs of self-developed large models."

Although concerns remain, Wall Street analysts are generally very bullish on Microsoft. Among the 16 analysts covering Microsoft tracked by the media, 15 rated the stock as "buy," and only 1 gave it a "hold" rating. The average target price among analysts is about $583, indicating nearly 40% upside potential and suggesting that Microsoft's stock price is expected to fully recover and reach new highs in the next 12 months.

The market expects Microsoft's stock price to potentially reach a multi-month high after the earnings report is released. Options pricing shows that traders expect Microsoft's stock price to fluctuate by up to 6% before the end of this week. If such an increase occurs based on last Friday's closing price, the stock price could approach $450, which would be the highest level since Microsoft announced its last earnings report at the end of January—when market concerns about the company's spending in the AI field and exposure to OpenAI led to a sharp decline in stock price. If it fluctuates down to the lower end of the range, the stock price could fall back to $391, giving back some of the gains from this month's tech stock rebound.

Morgan Stanley last week "stood by" Microsoft in its research report, rating the company as "overweight" with a target price of $650. Analyst Keith Weiss stated in a client report: "Microsoft showed strong business demand at the end of the second quarter of fiscal year 2026, but investors' focus remains on supply constraints and GPU allocation limiting Azure's growth, as well as growing concerns about Copilot's competitive position relative to AI Labs. Last quarter, Microsoft achieved double-digit revenue growth and expanded its operating profit margin. Its business product portfolio will continue to maintain strong momentum. Looking ahead to the third quarter of fiscal year 2026, Azure's growth will still depend on capacity availability rather than demand. Meanwhile, Microsoft continues to invest heavily in AI infrastructure, with capital expenditures primarily focused on short-term, revenue-generating assets (GPU/CPU)."

The analyst added that a growth rate of around 39% for Azure would be "clearly seen as" good news, especially considering he believes this target is achievable. He also stated: "Improvements in the Copilot product will boost market sentiment, and based on the key performance indicator of adding 15 million paid Copilot users last quarter, "Continue to maintain growth momentum, as Microsoft is expanding its user base." Analysts also pointed out that besides Azure's capacity (which Microsoft allocates to internal and external users), other factors worth noting include gross margin, operating profit margin, and the resource constraints of Azure, among others.

Goldman Sachs also maintains a bullish stance on Microsoft, giving it a "Buy" rating. Analyst Gabriela Borges stated that since Microsoft's last earnings report, the company's stock performance has been poor due to market concerns over its high capital expenditures and the competitive landscape of Azure. However, the current trading point seems to have taken most cautious factors into account. The analyst added that even with tight computing resources and management's continued focus on internal AI workloads, Azure still maintains a strong growth rate of over 30%. Additionally, while the increase in AI-driven capital expenditures has affected market sentiment, it highlights Microsoft's significant opportunities in the cloud computing and AI sectors in the long run