TLDR
- Microsoft stock fell 22% from its all-time high after fiscal Q2 2026 earnings on January 28, dropping over 10% in one day
- Only 15 million Copilot licenses sold for Microsoft 365 out of 400 million total licenses, representing just 3.7% penetration
- Azure revenue grew 39% year-over-year but decelerated from 40% growth the previous quarter
- Company faces 45% concentration risk with $281 billion of its $625 billion backlog tied to OpenAI alone
- Capital expenditures jumped to $37.5 billion in Q2 2026 while company-wide gross margins declined year-over-year
Microsoft stock has dropped 22% from its record high following disappointing fiscal Q2 2026 earnings. The company reported results on January 28 that sent shares tumbling more than 10% in a single day.
The tech giant now trades at $393.58, down from its peak of around $555. Despite strong overall revenue growth of 16.7% over the last twelve months, investors are worried about momentum in key AI businesses.
Copilot Struggles to Gain Traction
The company’s Copilot virtual assistant has failed to capture enterprise users. Out of 400 million Microsoft 365 licenses sold to businesses worldwide, only 15 million have added Copilot subscriptions.
That 3.7% penetration rate doubled from the prior year but fell short of expectations. Copilot serves as an AI assistant integrated into Word, Excel, Outlook and other Microsoft productivity tools.
Individual software developers showed stronger interest. Paid Copilot subscriptions for developers jumped 77% quarter-over-quarter.
Healthcare represents another bright spot. Dragon Copilot now serves over 100,000 medical professionals and documented 21 million patient encounters in Q2, triple the year-ago period.
Azure revenue grew 39% year-over-year during the second quarter. Wall Street had expected 37.1% growth. However, the company delivered 40% growth just three months earlier.
The deceleration raised red flags about Azure’s ability to maintain its growth trajectory. The cloud platform provides computing power and AI development tools to businesses worldwide.
Microsoft blamed data center capacity constraints for limiting Azure’s growth. Customer orders waiting for more infrastructure reached $625 billion, up 110% year-over-year.
OpenAI Dependency Creates Risk
The massive backlog contains a hidden problem. OpenAI accounts for 45% of the total, representing $281 billion in future commitments.
The startup lacks the cash to fulfill those orders upfront. OpenAI must rely on investor funding and revenue growth to meet its obligations.
CFO disclosed this concentration during the Q2 earnings call. Shareholder lawsuits filed in February 2026 allege Microsoft misled investors about the OpenAI relationship.
Capital expenditures surged to $37.5 billion in Q2 2026. Company-wide gross margins declined despite revenue growth.
The More Personal Computing segment fell 3% year-over-year. Gaming revenue dropped 9%, with Xbox content and services down 5%.
Microsoft now trades at a price-to-earnings ratio of 26.5 based on trailing twelve-month earnings of $15.98 per share. That marks the cheapest valuation in three years.
The Nasdaq-100 index trades at a P/E of 32.8, making Microsoft a discount to peers. Wall Street analysts forecast earnings could reach $19.06 per share in fiscal 2027, implying a forward P/E of 22.4.
The company maintains a 25.3% free cash flow margin and 46.7% operating margin over the last twelve months. Microsoft has generated 580,650% returns since its 1986 IPO.
Stock price is down to $393.58 as of February 5, 2026, with a market cap of $2.9 trillion.
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