Outlook on Financial Statements | Microsoft Corporation (MSFT.US) stock price under pressure due to massive capital expenditures and slowing growth of Azure. Is the Q3 performance a lifeline or another blow for Microsoft?

Microsoft Corporation (MSFT.US) stock price has experienced a roller coaster ride in 2026 so far. From the beginning of the year to the end of March, the stock price of Microsoft Corporation fell by nearly a quarter, but since then it has rebounded by almost 15%. As of last Friday's closing of the US stock market, the stock price of Microsoft Corporation has accumulated a 12% decline so far this year. The pressure on Microsoft Corporation's stock price this year is largely due to investor concerns about two things - its massive capital expenditure plans and the potential slowdown in growth of its cloud business Azure. Therefore, Microsoft Corporation's financial report for the third quarter of the 2026 fiscal year, which will be announced after the US stock market closes on April 29, will be a key test for the stock. This latest financial report will not only determine whether Microsoft Corporation can reverse investor concerns, but also provide an important window for investors to observe the broader field of artificial intelligence (AI). Currently, Wall Street analysts generally expect Microsoft Corporation's third-quarter revenue to grow by 16% year-on-year to $81.42 billion, with adjusted earnings per share of $4.07. What will investors be watching? Investors first hope to see whether Microsoft Corporation's substantial investment in AI strategy has translated into tangible revenue. Making money has never been a problem for Microsoft Corporation - its revenue in the last quarter reached $81.3 billion, up 17% year-on-year - but the market is concerned that expenditure growth is outpacing profit growth. Investors will be looking at how much capital expenditure Microsoft Corporation plans to invest in one or more quarters in the future. Perhaps there is no absolute "too high" number, as it depends on whether current investments are effectively translating into revenue. If the conversion is good, investors are likely to be more tolerant of Microsoft Corporation. Meanwhile, the performance of Azure's growth remains a key focus for investors. In the second quarter of the 2026 fiscal year, revenue from Azure and other cloud services (calculated at a fixed exchange rate) grew by 38% year-on-year, exactly in line with analysts' expectations, but the growth rate slowed by one percentage point from the previous quarter. The "slight drop" in Azure revenue growth rate is interpreted by the market as a signal that the AI-driven cloud growth story may be facing volatility, disappointing investors betting on stronger growth in Microsoft Corporation's cloud business. Additionally, although Microsoft Corporation's total contract backlog (RPO) reached $625 billion in the second quarter, excluding the OpenAI factor, its backlog growth was the lowest among the three major cloud giants (Azure, Alphabet Inc. Class C cloud, Amazon.com, Inc. AWS). The good news is that Azure's performance in the third quarter may exceed expectations and is expected to accelerate in the coming quarters. After all, Microsoft Corporation's second-quarter financial report showed that demand for computing power has consistently exceeded supply, with capacity constraints being the only issue. Faced with the challenge of a shortage of AI computing power, Microsoft Corporation has taken several measures. Last year, Microsoft Corporation 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 Corporation also announced an expansion of its partnership with Nscale to further enhance computing reserves in the future. With external cooperation, Microsoft Corporation can expand Azure's computing power scale rapidly without having to build new data centers from scratch. If the third-quarter financial report shows that additional computing power is gradually being implemented, it means that capacity constraints will continue to ease. This will also eliminate the biggest negative factor suppressing cloud business growth and dragging down Microsoft Corporation's stock price. Another important aspect is the M365 business. In recent years, investors have been focusing on Azure's growth data each quarter. Basically, as long as Azure's growth exceeds expectations and guidance is higher than market consensus, the stock price will rise, and vice versa. Although investors have some concerns about the future growth prospects of Azure, the strong demand for cloud services itself lessens the severity of the problem. In contrast, investors currently have significant doubts about M365 and Copilot. The biggest issue is the adoption rate of AI. Microsoft Corporation has stated that the current Copilot enterprise user base is "only" 15 million, accounting for only about 3% of its user base - in comparison, Gemini Enterprise AI users have exceeded 80 million, showing a significantly higher penetration rate. The growth of Copilot enterprise user seats has slowed significantly in recent quarters, currently down to 6%. M365 business revenue growth rate is also declining, reaching only 14% in the last quarter. While a growth rate of 14% may not be bad, the problem lies in the intensifying competition in the enterprise market. Anthropic is experiencing exponential growth in this market, and OpenAI is also making efforts, placing Microsoft Corporation at a disadvantage of falling behind in growth and market share in this sector. It is worth mentioning that the upcoming financial report from Microsoft Corporation will also provide an internal view of the AI ecosystem. Microsoft Corporation is deeply involved in three key stages of the AI industry chain: infrastructure, cloud computing, and software applications. From the perspective of infrastructure, Microsoft Corporation's current and future expenditure plans will directly affect market expectations for NVIDIA Corporation, as Microsoft Corporation is its largest customer. If Microsoft Corporation maintains its ambitious expenditure plans, it means that the demand for AI chips is still strong; however, if expenditure cuts are made, it may indicate that the AI infrastructure construction phase has reached a plateau. The market seems to have entered a new stage - investors are more concerned about how AI can make money rather than what it is capable of. Microsoft Corporation is deeply involved in both the infrastructure stage (the core of AI development in recent years) and the application commercialization stage (an area that enterprises are currently striving to commercialize), combined with its massive scale, putting it in the spotlight of the market. If Microsoft Corporation can prove that this transformation is being carried out profitably, it will be an important "concept validation" for the entire tech industry. Wall Street remains bullish Microsoft Corporation is currently facing multiple challenges: a significant increase in capital expenditure, constraints on computing power, and potential hindrances to the growth of its cloud business. Additionally, around 45% of Microsoft Corporation's business orders are deeply linked to OpenAI, which is unlikely to be profitable in the short term, with long-term cooperation posing hidden concerns. Furthermore, the ongoing conflict at GEO Group Inc. exacerbating global recession fears could also pose risks to Microsoft Corporation's business. Although some investors believe that any stock price retreat by a high-quality company like Microsoft Corporation is a clear "buy" signal" the majority of cautious factors have already been taken into consideration at the current trading point. Analysts point out that Microsoft Corporation may not be a "no-brainer" buy compared to Alphabet Inc. Class C, Amazon.com, Inc., or Anthropic in terms of AI. Analysts state that Microsoft Corporation's disadvantage compared to Alphabet Inc. Class C, Amazon.com, Inc., or Anthropic lies in the lack of competitive in-house chips, the absence of self-developed large models, and the difficulty in balancing computing power requirements between Azure and Microsoft Corporation's other businesses. Specifically, the absence of in-house chips means that with the same scale of capital expenditure, Microsoft Corporation receives less computing capacity than Amazon.com, Inc. or Alphabet Inc. Class C; the absence of self-developed models means that OpenAI, Anthropic, and Alphabet Inc. Class C have a greater advantage in building AI products; and the allocation of computing power issues undermines the brand image of Azure because customers find themselves not being prioritized. New computing power is prioritized for revenue-generating but slower-growing areas like Copilot and self-developed large models, while Azure, which offers the fastest return on investment, is not being given priority. Microsoft Corporation's management responds to this by saying, "If all the GPUs that were just launched were allocated to Azure, Azure's growth rate would definitely exceed 40%, but the company also needs to cater to high-margin businesses like M365 or Copilot and meet internal demand for self-developed large models." Although worries persist, analysts on Wall Street generally maintain a highly bullish stance on Microsoft Corporation. Out of the 16 analysts covering Microsoft Corporation tracked by the media, 15 have given the stock a "buy" rating, with only 1 giving a "neutral" rating. The analysts' average target price is around $583, implying a nearly 40% upside potential and suggesting that Microsoft Corporation's stock price may fully recover and reach new highs in the next 12 months. The market expects that Microsoft Corporation's stock price may reach its high point in the months following the release of the financial report. Option pricing shows that traders expect Microsoft Corporation's stock price to fluctuate by up to 6% by the end of this week. With the last Friday closing price as a reference, if there is such a significant increase, the stock price could reach nearly $450, which would be the highest level since Microsoft Corporation's last financial report was released at the end of January - when market concerns about the company's expenditure in the AI field and exposure to OpenAI led to a significant drop in stock price. If there is a downward fluctuation to the low end of the range, the stock price could fall to $391, giving back some of the gains from this month's rebound in tech stocks. Last week, Morgan Stanley supported Microsoft Corporation in a research report, with a "hold" rating and a target price of $650. Analyst Keith Weiss stated in a client report, "Microsoft Corporation showed strong commercial demand at the end of the second quarter of the 2026 fiscal year, but investor focus is still on the supply constraints and GPU allocation constraints on Azure's growth, as well as the growing concern about Copilot's competitive position relative to AI Labs. Last quarter, Microsoft Corporation achieved double-digit revenue growth and expanded operating profit margins. Its commercial product portfolio will continue to maintain strong momentum. Looking ahead to the third quarter of the 2026 fiscal year, Azure's growth still depends on availability of capacity rather than demand. Meanwhile, Microsoft Corporation continues to heavily invest in AI infrastructure, with capital expenditure focused on assets (GPU/CPU) that generate revenue in the short term." 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 can be achieved. He also mentioned, "Improvements to the Copilot product will boost market sentiment and continue to maintain growth momentum on the key performance indicator of adding 15 million paid Copilot users in the last quarter, as Microsoft Corporation expands its user base." The analyst also pointed out that besides Azure's capacity (which Microsoft Corporation will allocate to both internal and external users), other factors to watch include gross profit margin, operating profit margin, and the level of resource constraints in Azure, among others. Goldman Sachs Group, Inc. also maintains a bullish stance on Microsoft Corporation, giving it a "buy" rating. Analyst Gabriela Borges stated that since the last financial report was released by Microsoft Corporation, the company's stock price has underperformed due to market concerns about its high capital expenditure and the competitive situation in Azure. However, the current trading node seems to have already taken into account most of the cautious factors. The analyst added that despite a situation where computing power remains tight and management has focused on internal AI workloads, Azure continues to maintain strong growth of over 30%. Furthermore, while increased AI-driven capital expenditure has affected market sentiment, in the long term, it highlights the significant opportunities for Microsoft Corporation in the cloud computing and AI fields.