Shares of Microsoft Corp (Nasdaq: MSFT) were trading down about 3% in after‑hours activity following the company’s fiscal second‑quarter 2026 earnings release. The stock has slipped from recent highs, trading below its 52‑week peak near the mid‑$500s, while still above its 52‑week low in the low‑$400s, reflecting volatility in technology and software equities.
Microsoft posted revenue of $81.3 billion for the quarter ended Dec. 31, 2025, a 17% year‑over‑year increase, beating consensus expectations. The growth was led by robust gains in its cloud and productivity segments. Operating income also expanded year‑over‑year, but investors appeared focused on rising costs tied to AI infrastructure investments and elevated capital expenditures that pressured margins.
Total revenue of $81.3 billion represented a 17% increase compared with the year‑ago quarter. On a non‑GAAP basis, diluted earnings per share were $4.14, up about 24% year‑over‑year, topping many analyst forecasts. Net income on a GAAP basis climbed about 60% to $38.5 billion. Cloud revenue, reported as part of Microsoft Cloud (including Azure and other services), crossed $50 billion for the first time, growing 26% in constant currency.
Gross margin at the company level came in slightly lower year‑over‑year, reflecting increased AI infrastructure costs and a shift in sales mix toward cloud and AI‑related products. Operating expenses rose modestly, driven by research and development investments in compute capacity, AI talent, and gaming segment adjustments. Capital expenditures surged to $37.5 billion, up roughly 66% year‑over‑year, as the company continued to build out AI and cloud infrastructure.
Revenue from Productivity and Business Processes, which includes Office and LinkedIn, grew about 16% year‑over‑year, supported by Microsoft 365 commercial cloud momentum. Intelligent Cloud revenue, which includes Azure, rose 29%, with Azure and other cloud services up 39% in constant currency. More Personal Computing revenue declined modestly, reflecting lower gaming and Windows OEM contributions.
Cash from operations improved significantly, rising around 60% to $35.8 billion, while free cash flow was $5.9 billion, down modestly due to elevated capital outlays. The company returned $12.7 billion to shareholders through dividends and share repurchases, up about 32% year‑over‑year.
Compared with the second quarter of fiscal 2025, Microsoft’s double‑digit revenue and earnings growth underscore continued strength in cloud and AI demand. Revenue growth accelerated from the prior year’s pace of about 12% in the same quarter, driven by increasing commercial cloud services and adoption of AI‑enhanced offerings.
For the full fiscal year 2026, Microsoft reaffirmed its guidance for continued revenue and operating margin expansion, noting that early investments in AI infrastructure are expected to support longer‑term growth. Operating margins are projected to remain stable or increase slightly on a full‑year basis, despite near‑term margin headwinds.
Microsoft’s results came amid broader pressure on SaaS, cloud, and enterprise software stocks as markets weigh the impact of higher interest rates and slowing technology spending cycles. Large‑cap software names have shown mixed performance, with growth stocks underperforming cyclical and AI‑momentum sectors in recent months. Elevated capital outlays for AI infrastructure among major technology companies have also contributed to investor caution on margins and near‑term profitability.
Over the past year, MSFT shares have underperformed broader U.S. equity benchmarks, trading in a range that reflects investor concerns about cloud growth sustainability and competitive pressures, including from peers investing heavily in AI and data center capacity.
The post Microsoft shares fall after Q2 earnings as AI investments pressure margins first appeared on AlphaStreet.
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