Microsoft 2026 Q3 Earnings Preview: Can Azure’s Growth Momentum Keep Up With Massive AI Capital Spending?

As the core engine of Microsoft's growth, Azure's growth performance this quarter has attracted significant market attention.

According to industry preview data for the first three quarters of fiscal year 2026, Azure's revenue has shown a stepped increase, with Q1 revenue at $21.5 billion, Q2 climbing to $25.5 billion, and the Q3 preview value falling within the $26.3-$26.5 billion range. This represents a year-over-year growth rate of approximately 38%, which just hits the baseline growth target of 37%-38% for the full year, though it remains slightly short of the 40% stretch goal.

The core reason Azure's growth failed to surge higher is not the Nvidia GPU supply issues speculated by outsiders—upstream compute chip supply is currently sufficient—but rather Microsoft's internal compute power allocation priority strategy. More computing power has been tilted toward core SaaS products like M365 Copilot, which to some extent has squeezed the compute supply for third-party Azure customers. This directly led to Azure's 38% growth rate lagging behind Google Cloud's 48%.

Furthermore, after several consecutive quarters of rapid expansion, Azure's revenue base has reached a high level. The slowdown in growth caused by the base effect is a normal fluctuation and should not be over-interpreted as a setback for the AI strategy.

The partnership between Microsoft and OpenAI recently underwent a key adjustment. On April 27, the two parties announced their next-stage cooperation arrangements. Microsoft stated it would no longer pay revenue shares to OpenAI, while OpenAI's revenue-share payments to Microsoft will continue until 2030, with the payment ratio remaining unchanged and subject to an overall cap.

However, Microsoft remains OpenAI's primary cloud partner, with products prioritized for release on Azure. Additionally, the OpenAI IP license held by Microsoft will be extended to 2032, at which point the license will become non-exclusive.

Currently, OpenAI's contribution to Azure revenue has dropped below 20%, and Microsoft's early investments in OpenAI were mostly settled in the form of cloud credits, generating no actual cash flow. Meanwhile, Microsoft is optimizing its customer structure and reducing reliance on any single partner by collaborating with other model providers like Anthropic.

Last year, Microsoft had already, with emerging cloud service providers including Nebius ( NBIS ), CoreWeave ( CRWV ), Nscale, and Lambda, signed cooperation agreements totaling over $60 billion to supplement compute power through external channels. Earlier this month, Microsoft further expanded the scale of its cooperation with Nscale, bolstering its future compute reserves. Through such external partnerships, Microsoft can rapidly scale Azure's compute capacity without having to build data centers from scratch.

At the same time, Microsoft's remaining performance obligations increased to $6250 billion last quarter, a year-over-year increase of 109.7%, with the majority coming from the cloud services sector. This massive backlog provides clear predictability and solid support for Azure's future growth.

With the launch of new features such as AI agent workflows and Copilot "Cowork" collaboration tools, the Copilot experience continues to improve, and the paid user base is expected to further expand this quarter.

The SME market has emerged as a key growth engine, with Microsoft attracting approximately 5 million SME users through its "Copilot Starter Plan" low-price strategy. In addition, Copilot's high gross margin of around 85% (higher than Office 365's 75%) will continue to drive margin growth in the Productivity segment, potentially providing robust support for the company's overall profitability.

However, investors still have several core questions regarding the development of M365 and Copilot, with the market penetration of AI products being the focal point.

Data disclosed by Microsoft indicates that Copilot currently has 15 million enterprise seats, representing a penetration rate of about 3% of the total user base, while competitor Gemini Enterprise AI has exceeded 8 million users, leading significantly in penetration. At the same time, the growth rate of Copilot's enterprise seats has slowed markedly over recent quarters, dropping to 6%; M365 commercial revenue growth has also decelerated, reaching only 14% last quarter.

The market currently estimates that Microsoft's capital expenditure (CapEx) will reach $35.22 billion this quarter, with year-over-year growth poised to exceed 60% (specifically around 64.6%). Investors' primary concern at this stage is whether capital spending of this scale will pressure the company's free cash flow.

Microsoft's management remains clear that demand for compute capacity continues to outstrip supply. This stance not only highlights the resilience of the business but also further elevates market expectations for the company's future performance.

The core variables moving forward are Azure's growth rate and the trajectory of enterprise demand. If both continue to climb, Microsoft can frame its heavy investment as a strategic move to lock in market share early. However, if growth fails to keep pace with the rate of spending, market focus will shift from order volume to the return on investment cycle.

For investors, the central expectation is that Microsoft's aggressive AI strategy is translating tangibly into substantial revenue growth. As long as the conversion results meet expectations, investors are likely to remain tolerant of Microsoft's high investment levels.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.