Microsoft Is Tanking. What's Behind the Decline?

The share price of Microsoft (NASDAQ: MSFT) cratered last week -- down 11% on Thursday, the largest one-day drop in the tech giant's stock since March 2020. Shares rebounded a tiny bit in the afternoon to end 10% down on the day. What's going on? And what should investors expect now?

Microsoft released results Thursday morning for its fiscal second quarter, ended Dec. 31, 2025. Based on the headline numbers, you would have expected a great reaction from Wall Street. Revenue of $81.3 billion in the quarter was up 17% from a year ago. Diluted earnings per share increased 60% to $5.16. Operating income grew 21% to $38.3 billion. Both sales and earnings figures exceeded consensus analyst expectations.

Cloud revenue didn't match expectations

But investors looked past those numbers and focused narrowly on the company's spending and cloud sales growth. Capital expenditures rose 66% from a year earlier, to a massive $37.5 billion, higher than analyst estimates of $36.2 billion. Meanwhile, revenue from the company's Azure cloud computing unit, which reflects artificial intelligence (AI) demand, grew 38%.

Image source: Getty Images.

That cloud revenue figure sounds impressive, but it barely met analyst expectations. Worse for the stock price, the growth rate of cloud revenue slowed from the previous quarter. And the outlook for sales growth in the current quarter is 37% to 38%, with Wall Street wanting even higher growth.

Taken together, the growth in capital expenditures and the revenue from cloud computing painted a disappointing picture for investors. They expected a bigger payoff for all that investment. Thus, the plunge in the share price.

The reaction to Microsoft's results mirrors broader market expectations

It's pretty clear that investor expectations surrounding AI investments are sky-high right now, as evidenced by the massive rallies in shares of the "Magnificent Seven" tech stocks over the past several years.

These companies are pumping billions of dollars into AI data centers, research and development, and related infrastructure. And Wall Street, always a bit impatient, wants to see a payoff, in terms of revenue and profits, from that boom in capital expenditures sooner rather than later.

Also, the competition among the Magnificent Seven companies is fierce. That's why shares of Meta Platforms (NASDAQ: META) surged on Thursday, up more than 10% on the day. Meta also reported results on Thursday, but unlike Microsoft, the company raised its guidance on sales in the current quarter, to a range of $53.5 billion to $56.5 billion, which is higher than the $51.4 billion consensus estimate.

When it comes to earnings and their impact on share prices, it's all about expectations, of course. Meta beat them and Microsoft didn't. Because of the mania in the stock market surrounding AI, all AI-related stocks will have to continue to outperform expectations -- or see their share prices suffer.

Matthew Benjamin has positions in Microsoft. The Motley Fool has positions in and recommends Meta Platforms and Microsoft. The Motley Fool has a disclosure policy.