Microsoft Records Second-Largest Value Loss in US History; Is the 12% Intraday Slump an Overreaction?

TradingKey - On January 28, Eastern Time, Microsoft (MSFT) released its fiscal 2026 Q2 earnings report, with both revenue and profit exceeding Wall Street expectations. However, the market was unimpressed, and the stock plunged more than 12% intraday on Thursday, causing its market value to evaporate by approximately $430 billion at one point—a loss equivalent to the entire size of Alibaba (BABA) .

On Thursday, Microsoft ultimately closed down 9.99%, marking its largest closing decline since March 2020. Market value fell by approximately $357 billion, with its closing market capitalization dropping to $3.22 trillion.

According to Dow Jones Market Data, the market value lost in this plunge represents the second-largest single-day evaporation in U.S. stock market history, surpassed only by Nvidia's (NVDA) $593 billion loss in January 2025, which was driven by concerns surrounding DeepSeek.

Despite Q2 results beating expectations, why was the market dissatisfied? What kind of "red flags" could cause a company of Microsoft's scale to drop nearly 10% overnight?

Slowing Azure Growth vs. Sky-High CapEx

Analysts believe the volatility in market sentiment stems primarily from the gap between surging capital expenditures and underperformance in Azure's growth.

The earnings report showed that Microsoft's Q2 capital expenditure increased 66% year-over-year to a record $37.5 billion, 9% above consensus expectations. In contrast, revenue growth for Azure and other cloud services slowed by 1 percentage point compared to the previous quarter. Although cloud revenue achieved 39% year-over-year growth (38% in constant currency), the slowdown was clearly unacceptable to the market given the higher-than-expected capital spending: if capital is being poured into AI infrastructure without translating into core business revenue, what exactly is Microsoft's strategy?

Some analyses suggest the slowdown in Azure growth is due to Microsoft prioritizing computing resources for internal R&D projects like Copilot and its primary partner, OpenAI, rather than selling them to third-party enterprise customers on Azure. Reports indicate that had Microsoft not shifted capacity in this way over the past two quarters, Azure's revenue growth would have exceeded 40%. While external Azure revenue may be impacted in the short term, Goldman Sachs believes this allocation strategy will ultimately yield better returns in the medium term.

However, the market is concerned about more than just Q2 growth; Microsoft's guidance for next quarter's Azure revenue growth is 37%-38%, implying a continued slowdown in the cloud business. Microsoft management stated that the primary reason is the capacity constraints Azure is currently facing, while Goldman Sachs (GS) emphasized that investors should not view this as a mere reflection of demand.

Although demand remains robust, capacity constraints are still not a positive signal. Microsoft CFO Amy Hood stated that customer demand continues to outpace supply; CEO Satya Nadella noted that because existing supply is severely insufficient while demand is immense, Microsoft has had to spend "aggressively," adding nearly 1 gigawatt of total computing capacity in the second fiscal quarter alone. Regarding future capacity increases, Nadella expects total AI capacity to grow by over 80% in the next two years, though capacity constraints will persist until 2026.

This creates a vicious cycle: the greater the capacity shortage, the more capital must be deployed, while simultaneously necessitating the allocation of capacity away from Azure to other businesses, further worsening Azure's revenue growth outlook. As Azure is Microsoft's core business and the reason the market values it as a cloud company with a high multiple, any deterioration in expectations will lead to a significant valuation markdown, making a rebound in Microsoft's stock price even more difficult.

Furthermore, when monetization lags behind the pace of spending, Microsoft must not only increase expenditures and sacrifice cash flow but also accept lower gross margins. Over the past five quarters, gross margins have declined from 72% to 67%. Microsoft also lowered its overall gross margin guidance for the next quarter from 67% to 65%, citing more urgent delivery requirements for major clients like OpenAI, which necessitates prioritizing the deployment of higher-cost computing resources over immediate profitability. While strategic investments to capture market share are understandable, the market remains concerned about how long this model will last and its ultimate sustainability.

Additionally, Microsoft's excessive reliance on OpenAI for future revenue has sparked market concern. Manish Kabria, head of US equity strategy at Société Générale, noted that the market is closely watching Microsoft's exposure risks to OpenAI. The Q2 report showed that 45% of Microsoft's $625 billion in future cloud service contracts comes from OpenAI.

Reports indicate that OpenAI is in funding talks to raise nearly $40 billion, with potential investors including Nvidia, Microsoft, and Amazon (AMZN) . This essentially amounts to Microsoft providing funds for OpenAI to purchase its own cloud services; however, whether this kind of circular financing can truly drive external growth remains a source of market concern.

Bull Case: Azure’s Resilience and the Path to Capacity Recovery

While Microsoft's stock drop was not unwarranted, some analysts believe the reaction was overblown. Regarding Azure's growth—the market's primary focus—the rate remains robust despite the sequential decline. According to analyst forecasts, Google Cloud's growth may accelerate to around 35% during the same period, while Amazon's AWS growth is expected to be around 21%, meaning Azure's growth significantly outperforms them. DA Davidson analyst Gil Luria explained that investors were dissatisfied because they were expecting Azure to continue accelerating and crush its competitors.

Deutsche Bank analyst Brad Zelnick stated that Azure's growth remains well above the market average and that its momentum is likely to persist in the coming quarters, even on a higher base. Citi (C) analyst Tyler Radke believes that after the slowdown caused by internal factors, Azure's growth could accelerate.

Furthermore, Azure's performance is constrained by Microsoft's capacity, and Morgan Stanley (MS) analyst Keith Weiss and his team pointed out that the pace of capacity expansion might be much steadier than investors anticipate. The new Fairwater AI data center is expected to become operational early this year with no significant delays. The project is projected to provide approximately 500 megawatts of capacity by mid-summer and is on track to reach 1 gigawatt by year-end.

The MAIA 200 chip, released by Microsoft on January 26, is another positive signal; benchmarks show its performance outperforms competitors' internal chips, potentially becoming a key factor in differentiating gross margins and price-performance ratios in the future.

Currently, Wall Street investment banks are generally optimistic about Microsoft's outlook. Based on the latest ratings, Deutsche Bank, Goldman Sachs, and UBS (UBS) , and Citi have all issued "Buy" ratings, while Barclays (BCS) , and Morgan Stanley have issued "Overweight" ratings. Morgan Stanley stated that at 21 times fiscal 2027 earnings per share, the current valuation even underestimates Microsoft's prospects.