Here’s an earnings report with some shocking numbers: Microsoft It reported that its cloud business quarterly revenue passed the important milestone of $50 billion, and said that its backlog of demand has more than doubled to $625 billion, driven by OpenAI. But the tech giant’s shares plunged nearly 5% in after-hours trading after its second-quarter earnings report. earnings release That points to slower Azure revenue growth and Microsoft’s admission that capacity constraints will continue “at least” until the end of its fiscal year in June.
profit period call Chairman and CEO Satya Nadella and Chief Financial Officer Amy Hood met with analysts after the close on Wednesday to express investor concerns about slowing Azure platform revenue growth and soaring capital spending — both signs that the company is struggling to keep up with demand for artificial intelligence. Together, the two numbers raise questions about whether Microsoft can build computing power as quickly as planned and whether the issue will further limit Azure’s growth. Essentially, investors are worried they may be seeing the first red flag of yellow flags.
“One of the core issues weighing on investors is that capital spending is growing faster than we expected, and Azure may be growing a little slower than we expected,” said Keith Weiss, director of U.S. software research. Morgan Stanleyduring the call. “It fundamentally comes down to concerns about (return on investment) and capital expenditures over time.”
arrive level set: Microsoft spent $34.9 billion on capital expenditures first quarter In fiscal 2026 alone, about half will be dedicated to assets such as GPUs and CPUs, the chips used in PCs, servers and Azure data centers. exist Q2capital expenditure is roughly $37.5 billionwhich brings the first-half total to $72.4 billion, indicating huge infrastructure spending. Hood told investors in the first quarter that the company is seeing growing demand and rising RPO balances, which means it will increase spending on chips.
At the same time, Azure Growth levels off and declines It rose from 40% in the first quarter to 39% in the second quarter. “We continue to see strong demand across workloads, customer segments and geographies, and demand continues to exceed available supply,” Hood said on the call.
The latest earnings numbers have investors thinking about capacity constraints and return on investment.
Hood dismissed the idea that investors should draw a direct correlation between capital spending and Azure revenue figures. “Sometimes I think it’s good to think about the Azure guidance that we provide as an allocated capacity guide on what we can provide in Azure revenue,” Hood said in response to Weiss’ question.
“The first thing we want to do is address the increased usage and pace of M365 Copilot as well as GitHub Copilot,” she said. Then, Microsoft invests in R&D and product innovation, which are long-term investments. “Ultimately, what’s left will be used to service Azure capacity, and demand for Azure capacity will continue to grow,” Hood said.
Hood said that if Microsoft allocated all new GPUs in the first and second quarters exclusively to Azure, Azure’s growth would be much higher than the 39% Microsoft reports.
Nadella reinforced Hood’s point, noting that investors should evaluate the performance of AI companies as a whole. He said investors should “obviously” consider Azure but should not forget Microsoft 365 Copilot, Github Copilot, Dragon Copilot and Security Copilot, all of which include artificial intelligence.
“It’s important for us to get Azure customers, but it’s equally important to get M365, GitHub or Dragon Copilot (customers),” Nadella said. Computing spending can also serve as an investment similar to R&D, he said.
“You have to think of computing as R&D, that’s the second element of it,” Nadella said. “Obviously, we’re leveraging all of this for long-term optimization.”
Still, investors may remain concerned that ongoing capacity constraints could prevent the tech giant from converting its record RPO backlog, reported in filings as remaining performance obligations (RPOs), into revenue growth as Wall Street expects. Additionally, investors will be looking for signs in the next quarter that revenue growth justifies infrastructure spending.
Although investors were concerned and shares fell after hours, much of the news in the latest earnings report was positive. Microsoft reported second-quarter revenue of $81.3 billion, an increase of 17% from $69.6 billion in the same period last year, exceeding the company’s guidance of $79.5 billion, reaching $80.6 billion. Operating income increased 21% to $38.3 billion from $31.7 billion, and diluted earnings per share increased 24% to $4.14 from $3.35. In addition, the quarterly revenue of the cloud business exceeded US$50 billion for the first time, reaching US$51.5 billion, a year-on-year increase of 26%.
RPO increased 110% year over year to $625 billion, in part due to OpenAI’s $250 billion commitment announced in October. Hood said investors shouldn’t worry about exposure to one of Microsoft’s major partners, noting that about $344 billion in RPOs came from various other customers. RPO for this group of customers increased 28% year over year, which Hood said was higher than most Microsoft peers.
“55% of that, or about $350 billion, is related to our portfolio breadth, customer breadth, across solutions, across Azure, across industries, across geographies,” Hood said. “Frankly, I think we have extremely high confidence in that.”