Microsoft Earnings Look Strong, But Investors Focus on Risks

Key Points

• Microsoft beat Q3 2026 earnings expectations, driven by 40% Azure growth and surging AI revenue.
• Rising CapEx and OpenAI concerns weighed on sentiment despite strong underlying fundamentals.
• Analysts still see significant upside for MSFT, suggesting the pullback may be a buying opportunity.

Earnings reports are like progress reports in the sense that they require investors to digest facts and make educated guesses about the company’s future prospects. In the case of Microsoft Corp. NASDAQ: MSFT, investors are more concerned with future risks than with solid results in the present.

The highlights from the company’s Q3 2026 earnings report start with a top and bottom-line beat. Microsoft reported 40% growth in its Azure cloud computing segment. That beat the high end of its guidance. The company’s AI business is now generating $37 billion annually, a 123% year-over-year (YOY) increase.

The company also reported that Copilot passed 20 million paid seats, up from 15 million in the prior quarter. That still represents a small fraction of the company’s user base, but the sizable beat shows that momentum is on Microsoft’s side for a platform that’s ancillary to its core business.

But MSFT fell about 5% the day after earnings. Investors are focusing on two key issues: The company’s capital expenditures, and its relationship with OpenAI.

The Basics of Supply and Demand Are Raising CapEx Plans

Microsoft announced that capital expenditures in its current quarter would exceed $40 billion, bringing the company’s full-year total to $190 billion. Chief executive officer Satya Nadella attributed about $25 billion (over 60%) of the quarterly total to higher component pricing for GPU and CPU hardware.

Putting aside what that has meant for a company like Intel NASDAQ: INTC and what it likely means for chipmaker earnings such as NVIDIA NASDAQ: NVDA and Advanced Micro Devices NASDAQ: AMD, the increased spending is being driven by the basics of supply and demand.

That’s a cost of doing business, but as Microsoft’s $37 billion in AI revenue shows, it’s a cost that is starting to deliver a return.

A “Cloud” Over the OpenAI Relationship

In its Q2 2026 earnings report, released in January, Microsoft reported a commercial backlog of $625 billion, a 110% YOY increase. In the most recent quarter, the company’s remaining performance obligation (RPO), which is the closest proxy for backlog, came in at $627 billion. That's still 99% YOY growth, but it means the sequential gain was nearly flat.

It’s also where context matters. About 45% of the backlog stems from the company’s relationship with OpenAI, including its $250 billion Azure commitment from October 2025.

However, in February, OpenAI cut its compute spending budget for the coming years by more than 50% from $1.4 trillion to $600 billion. That is leading some investors to wonder if Microsoft’s backlog is as solid as it sounds.

But the recent restructured agreement between Microsoft and OpenAI should dispel those ideas. Under the new terms, OpenAI products will still be prioritized for release on Azure, and Microsoft will continue to be OpenAI’s primary cloud provider.

That means that while Microsoft’s share of OpenAI's business will be less than 100%, the existing payment obligations to Microsoft will continue. In fact, the new deal helps Microsoft reduce its cash outflows while continuing to receive cash inflows and reducing its legal risks.

Microsoft Is Still an Azure Story

Stripping out OpenAI entirely, Microsoft's underlying RPO still grew 26%. That would be in line with historical norms and a sign that Microsoft's core commercial business is compounding steadily on its own.

More importantly, Azure growth re-accelerated to 40% this quarter after slipping to 38% in Q2, directly contradicting the bear thesis that Azure is entering a period of structural deceleration. Furthermore, it suggests the capacity constraints that weighed on Q2 are easing, and that real enterprise demand, not just OpenAI commitments, is absorbing Microsoft's cloud buildout.

Psychology Is Winning Over Fundamentals

There was nothing wrong with Microsoft’s earnings report. A slightly lower Q4 revenue forecast and an equally slight slip on operating margin don’t explain a drop of over 5% in MSFT the day after earnings.

This is about the presumption that many things that can go wrong will go wrong. That includes OpenAI revenue drying up, which would lead to slowing Azure growth, which could call the entire data center buildout into question. It would also leave Microsoft without a significant return for the cash that's coming off its balance sheet.

However, all of that is based on the persistent belief that an AI bubble is real, even when real earnings results do not support that conclusion.

But should you buy MSFT at this level? To answer that, investors have to deal with the current state of the stock as it relates to the company’s earnings.

Trading at around 24x forward earnings and 10x sales, MSFT is hardly expensive compared to its own history and the premium normally afforded to blue-chip technology stocks. That will be particularly true if the projected earnings growth estimates are too low.

Analysts are maintaining their bullish rating on Microsoft, but price targets moved lower the day after earnings. That said, the consensus price target of $555.95 still suggests 37% upside for MSFT. That hardly puts MSFT on the clearance rack, but it presents an opportunity for solid, long-term growth.

Since hitting a 52-week low at the end of March, the stock has made a nice rally, and nothing in the new price targets suggests a return to recent lows is warranted.

That makes this a good entry point on an anticipated recovery in the coming weeks.