TLDR
- Following fiscal Q2 2026 earnings released on January 28, Microsoft stock declined 22% from its all-time high, with a more than 10% drop in a single day
- Of the 400 million total Microsoft 365 licenses, only 15 million include Copilot licenses, translating to a penetration rate of just 3.7%
- Azure’s revenue saw a 39% year-over-year increase, though this growth slowed from the 40% expansion recorded in the prior quarter
- The company confronts a 45% concentration risk, as $281 billion of its $625 billion backlog is solely linked to OpenAI
- Capital expenditures rose to $37.5 billion in Q2 2026, even as company-wide gross margins decreased compared to the previous year
Following underwhelming fiscal Q2 2026 earnings, Microsoft stock has slipped 22% from its record high. The results, reported on January 28, caused shares to plummet by over 10% in a single day.
The tech giant now trades at $393.58, down from its approximate peak of $555. Even with robust overall revenue growth of 16.7% over the past twelve months, investors are concerned about the momentum in critical AI businesses.
Copilot Struggles to Gain Traction
The company’s Copilot virtual assistant has not gained significant traction among enterprise users. Globally, among the 400 million Microsoft 365 licenses sold to businesses, only 15 million have included Copilot subscriptions.
This 3.7% penetration rate is double that of the previous year but still missed expectations. Copilot functions as an AI assistant integrated into Word, Excel, Outlook, and other productivity tools.
Individual software developers have shown greater interest. Paid Copilot subscriptions for developers increased by 77% quarter-over-quarter.
Healthcare is another positive area. Dragon Copilot now serves more than 100,000 medical professionals and recorded 21 million patient encounters in Q2, which is three times the number from the same period a year ago.
During the second quarter, Azure’s revenue grew 39% year-over-year. Wall Street had anticipated 37.1% growth, yet the company had posted 40% growth just three months prior.
This slowdown has raised concerns about Azure’s capacity to sustain its growth trajectory. The cloud platform offers computing power and AI development tools to businesses globally.
Microsoft attributes Azure’s growth limitations to data center capacity constraints. Customer orders pending additional infrastructure reached $625 billion, a 110% increase from the previous year.
OpenAI Dependency Creates Risk
The massive backlog holds a hidden issue. OpenAI accounts for 45% of the total, amounting to $281 billion in future commitments.
The startup does not have sufficient cash to fulfill these orders upfront. OpenAI must depend on investor funding and revenue growth to meet its commitments.
The CFO revealed this concentration during the Q2 earnings call. Shareholder lawsuits filed in February 2026 claim that Microsoft misled investors regarding its relationship with OpenAI.
Capital expenditures spiked to $37.5 billion in Q2 2026. Even with revenue growth, company-wide gross margins decreased.
The More Personal Computing segment saw a 3% year-over-year decline. Gaming revenue decreased by 9%, with Xbox content and services down 5%.
Based on trailing twelve-month earnings of $15.98 per share, Microsoft currently trades at a price-to-earnings ratio of 26.5, which is its lowest valuation in three years.
The Nasdaq-100 index has a P/E ratio of 32.8, meaning Microsoft is valued at a discount compared to its peers. Wall Street analysts project that earnings could reach $19.06 per share in fiscal 2027, suggesting a forward P/E of 22.4.
Over the past twelve months, the company has maintained a 25.3% free cash flow margin and a 46.7% operating margin. Since its 1986 IPO, Microsoft has generated 580,650% in returns.
As of February 5, 2026, the stock price has dropped to $393.58, with a market capitalization of $2.9 trillion.