TLDR
- Microsoft stock fell 22% from record highs to $393.58 after fiscal Q2 2026 earnings missed AI expectations
- Copilot penetration remains stuck at 3.7% with only 15 million licenses sold versus 400 million potential users
- Azure revenue growth slipped to 39% year-over-year from 40% in prior quarter raising deceleration fears
- OpenAI accounts for $281 billion or 45% of Microsoft’s total $625 billion customer backlog
- Stock now trades at P/E of 26.5, the cheapest multiple in three years below Nasdaq-100’s 32.8
Microsoft shares have plummeted 22% from all-time highs following disappointing fiscal Q2 2026 earnings. The stock crashed over 10% on January 28 as investors reacted to weak AI performance metrics.
Shares closed at $393.58 on February 5, down sharply from the $555 peak. The decline erased months of gains despite Microsoft posting 16.7% revenue growth over the trailing twelve months.
Wall Street focused on warning signs in the company’s AI business. Both Copilot and Azure showed troubling trends that sparked the massive selloff.
Microsoft’s Copilot AI assistant has failed to gain traction with business customers. The company sold just 15 million Copilot licenses for Microsoft 365 out of 400 million available enterprise seats.
That 3.7% penetration rate doubled from a year ago but fell far short of investor expectations. Copilot embeds AI features into Office applications like Word, Excel and Outlook.
Some niches showed stronger results. Paid Copilot subscriptions for individual developers surged 77% from the previous quarter.
Healthcare emerged as a growth area. Dragon Copilot now serves over 100,000 medical professionals and handled 21 million patient encounters in Q2, triple the prior year.
Azure Momentum Slows
Azure cloud platform revenue grew 39% year-over-year in the second quarter. The result exceeded Wall Street’s 37.1% consensus forecast.
However, Azure delivered 40% growth just three months earlier. The one point deceleration raised red flags about the platform’s ability to sustain its pace.
Microsoft blamed limited data center capacity for constraining faster expansion. Customer orders awaiting infrastructure jumped 110% year-over-year to $625 billion.
The backlog contains a dangerous concentration. OpenAI represents $281 billion or 45% of total future commitments according to the CFO’s earnings call disclosure.
The AI startup lacks the financial resources to immediately fund those orders. OpenAI must rely on outside investors and revenue growth to meet its obligations.
OpenAI Dependency Creates Major Risk
Shareholder lawsuits filed in February 2026 allege Microsoft misled investors about the scale of OpenAI reliance. The partnership creates execution risk if OpenAI underperforms or the relationship deteriorates.
Capital spending soared to $37.5 billion in Q2 2026 as Microsoft builds AI data centers. Company-wide gross margins contracted despite revenue increases, pressuring profit metrics.
Traditional business segments showed weakness. The More Personal Computing division fell 3% year-over-year as gaming revenue dropped 9%.
Xbox content and services declined 5% in the quarter. The legacy business struggles offset some AI momentum.
Microsoft trades at a price-to-earnings ratio of 26.5 based on trailing twelve-month earnings of $15.98 per share. That represents the lowest valuation in three years.
The Nasdaq-100 index trades at 32.8 times earnings, making Microsoft cheaper than tech peers. Wall Street analysts project fiscal 2027 earnings of $19.06 per share, implying a forward P/E of 22.4.
The company maintains strong fundamentals with 25.3% free cash flow margin and 46.7% operating margin. Microsoft’s market cap stands at $2.9 trillion as of February 5, 2026.
