The “Black Monday” market crash in October 1987, when the Dow plunged more than 22%. The antitrust ruling against Microsoft in April 2000, when a federal judge declared the company a monopolist. The Surface RT writedown in July 2013, when a $900 million bet on tablets went bad. The COVID crash of March 2020, when the world shut down and the market fell off a cliff.
Now add to the list of Microsoft’s worst single-day stock plunges: the company’s earnings beat for the second quarter of fiscal 2026, last Wednesday, Jan. 28.
Microsoft’s shares fell as much as 12% in intraday trading on Thursday, before closing at $433.50, down 10%, erasing $357 billion from its market value.
It was the largest single-day dollar loss in Microsoft’s history and the seventh-largest percentage decline since the company went public in 1986. The last time Microsoft’s shares fell this much after an earnings report was that Surface RT debacle 13 years ago. The stock barely moved on Friday, leaving the massive losses intact going into the upcoming week.
On the surface, the quarter itself was strong. Revenue rose 17% to $81.3 billion. Adjusted earnings hit $4.14 per share, above the $3.91 consensus. Operating margin was 47.1%. Microsoft Cloud revenue was more than $50 billion for the first time.
“Even in these early innings, we have built an AI business that is larger than some of our biggest franchises that took decades to build,” Microsoft CEO Satya Nadella said on the earnings call.
The concerns behind the numbers
So what happened? Several factors are playing out behind the scenes.
Microsoft’s Azure cloud platform grew 38% in constant currency, ahead of its own forecast. But Wall Street’s “whisper number” was 39.4%, and that miss was enough to shake the market.
Capital spending soared to $37.5 billion in the quarter, up 66% from a year ago, illustrating the size of the risk Microsoft is taking. The company is racing against Amazon, Google, and others to build data centers and buy chips to compete in AI.
Microsoft 365 Copilot, the AI assistant that the company has built into its Office apps, has 15 million paid users. That sounds like a lot until you consider that Microsoft 365 has 450 million paid seats. Copilot has reached a little more than 3% of them.
Microsoft’s outlook for the upcoming quarter didn’t help. Its forecast for the Windows and Devices business was more than $1 billion below what analysts expected, as the wave of PC upgrades sparked by Windows 10’s end of life runs its course and loses steam.
But the number that seemed to concern investors most was this: 45% of Microsoft’s $625 billion in remaining performance obligations (RPO) is tied to OpenAI.
RPO represents contracts that customers have signed but Microsoft has not yet fulfilled. It is a measure of future revenue already locked in. Microsoft’s report showed that roughly $281 billion of that backlog is committed to a single customer, a company that is still burning cash and searching for a sustainable business model.
The question is whether that investment will ultimately pay off in demand from Microsoft’s business customers, not just from OpenAI and other AI companies.
In a post before earnings, Judson Althoff, CEO of Microsoft’s commercial business, pointed to customers using AI to solve real problems: Epic generating 16 million patient record summaries a month, Land O’Lakes building an assistant that turns an 800-page crop guide into instant recommendations for farmers, Mercedes-Benz using AI agents to cut factory issue diagnosis from days to minutes.
A ‘prove it’ moment
But analysts at UBS reflected the broader market skepticism, as noted by CNBC. Although Microsoft 365 commercial revenue was up 16% in the quarter, to more than $24.5 billion, that’s not because of Copilot, they said, citing their checks with customers.
“We think Microsoft needs to ‘prove’ that these are good investments,” they wrote.
Others were more optimistic. Morningstar maintained its $600 fair value estimate for Microsoft, calling results “consistent with our long-term thesis.” The stock, which closed Friday at $430, “remains one of our top picks,” analyst Dan Romanoff wrote.
William Blair analyst Jason Ader titled report “A Lot to Like” and noted that demand for AI and cloud services continues to outpace supply. The firm also pointed to accelerating enterprise adoption, observing that the number of customers with more than 35,000 Copilot seats tripled year-over-year.
Wedbush analyst Dan Ives maintained an “Outperform” rating but lowered his price target to $575. He cited friction between long-term investments and short-term investor patience.
“The Street wanted to see less cap-ex spending and faster cloud/AI monetization,” Ives wrote, “and coming out of the gates it’s the opposite.” He described 2026 as an “inflection year” for the company and called the selloff a buying opportunity.
Rick Sherlund has watched Microsoft go through these plunges before. The longtime Wall Street analyst, who started covering the company when it went public, observed in an appearance on CNBC that the market seemed to be in “a foul mood” last week.
Consumer AI tools like ChatGPT get the attention, but businesses actually pay. The real driver, Sherlund said, will be agentic AI, where software agents interact with enterprise systems and with each other, burning enormous computing cycles in the process.
“I would argue that in terms of demand, we are really just getting started,” he said.
Judging from the market’s mood, Microsoft is no longer getting the benefit of the doubt.
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