Shares of Microsoft fell sharply on Thursday, dropping around 5% to $402.37 in early trading, as investors reacted to the company’s elevated capital spending outlook despite strong cloud growth and an earnings beat.
The decline came even as broader markets showed mixed performance.
The S&P 500 edged up 0.1%, while the Nasdaq Composite slipped 0.3%. The Dow Jones Industrial Average rose 414 points, or 0.8%.
Earnings beat driven by cloud strength
Microsoft reported adjusted earnings of $4.27 per share on revenue of $82.9 billion for its fiscal third quarter, exceeding analyst expectations of $4.05 per share on $81.4 billion in revenue, according to FactSet.
The company’s Azure cloud division was a standout performer, with revenue growing 40% year-on-year, ahead of estimates of 37.9%.
Microsoft also guided for Azure growth of 39% to 40% in the fiscal fourth quarter, above Wall Street expectations of 36.8%.
Capex surge weighs on sentiment
Despite the strong operational performance, investor sentiment was dampened by a sharp increase in capital expenditure.
Microsoft reported quarterly capex of $31.9 billion, up 49% year-on-year, while free cash flow fell 22% to $15.8 billion as the company ramped up investments to support rising demand for cloud and AI services.
The company stated that it anticipates capital expenditures to exceed $40 billion in the next quarter and forecasts total annual capital spending of approximately $190 billion, which is significantly higher than Wall Street’s estimate of $160 billion.
Microsoft is among a group of major technology firms investing heavily in artificial intelligence infrastructure, including data centres and advanced computing systems.
While these investments are aimed at capturing long-term growth opportunities, they have raised concerns among investors about near-term returns, particularly as higher spending pressures cash flow.
Wall Street’s sentiment has shifted from initially welcoming aggressive AI investment to demanding clearer evidence of monetisation and profitability.
Wall Street analysts raise price targets on MSFT
Stifel raised its price target on Microsoft to $415 from $392 while maintaining a Hold rating.
The firm cited Azure growth exceeding expectations.
However, Stifel noted that capital expenditure growth exceeding commercial cloud growth by more than two times may be contributing to investor caution.
BMO Capital raised its price target to $515 from $505 and maintained an Outperform rating, highlighting strong Azure performance and guidance that exceeded expectations.
The firm said accelerating Azure growth in the second half of 2026 could help offset rising capital expenditure requirements, though it also expects spending estimates for fiscal 2027 to increase materially.
Goldman Sachs lifted its price target to $610 from $600, maintaining a Buy rating.
Analyst Gabriela Borges based the valuation on a 28-times price-to-earnings multiple applied to forward earnings.
The stock currently trades at a price-to-earnings ratio of 26.57 with a price-to-earnings-growth ratio of 0.93, suggesting relative valuation support given its growth prospects.
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