Microsoft reports earnings with Azure growth in focus

Microsoft (MSFT) is scheduled to report results of the second quarter of its fiscal year 2026 after the market close on Wednesday, January 28, with a conference call scheduled for 5:30 pm ET.

What to watch for:

EXPECTATIONS: In its fiscal first quarter, the company reported earnings and revenue that beat consensus forecasts.

Satya Nadella, chairman and CEO of Microsoft, said along with the Q1 results: “Our planet-scale cloud and AI factory, together with Copilots across high value domains, is driving broad diffusion and real-world impact.”

Nadella added on the company’s call: “It was a very strong start to our fiscal year. Microsoft cloud revenue surpassed $49 billion, up 26% year over year. And our commercial RPO increased over 50% to nearly $400 billion, with a weighted average duration of only two years. We’re seeing increasing demand and diffusion of our AI platform and family of copilot’s, which is fueling our investments across both capital and talent.”

Current consensus EPS and revenue forecasts for Microsoft’s December-end quarter stand at $3.85 and $80.27B, respectively, according to data provided by S&P Global Market Intelligence.

ANTHROPIC INVESTMENT: On November 18, Microsoft, Nvidia (NVDA) and Anthropic announced new strategic partnerships. “Anthropic is scaling its rapidly-growing Claude AI model on Microsoft Azure, powered by Nvidia, which will broaden access to Claude and provide Azure enterprise customers with expanded model choice and new capabilities,” the companies said in a blog post. Anthropic has committed to purchase $30B of Azure compute capacity and to contract additional compute capacity up to one gigawatt. As part of the partnership, Nvidia and Microsoft are committing to invest up to $10B and up to $5B respectively in Anthropic. “For the first time, Nvidia and Anthropic are establishing a deep technology partnership to support Anthropic’s future growth…Microsoft and Anthropic are also expanding their existing partnership to provide broader access to Claude for businesses,” the companies added.

Following that expanded partnership announcement, Morgan Stanley analyst Keith Weiss reiterated an Overweight rating and $650 price target on Microsoft shares. The firm said the announcement aligns with its view that the Microsoft story is broader than just generative AI, and the genAI story is broader than just OpenAI. Microsoft has strong positioning across multiple secular growth drivers, including genAI, migration of Enterprise workloads to the Public Cloud, cybersecurity, and across all these an ongoing push towards consolidation of spend with fewer vendors, the analyst tells investors in a research note. The firm added that the durability of topline demand and potential for further margin expansion displayed in Microsoft’s recent Q1 print remained “well underpriced.”

DOWNGRADE: The same day, Rothschild & Co Redburn downgraded Microsoft to Neutral from Buy with a price target of $500, down from $560. The firm says “it is time to take a more cautious stance on the hyperscalers.” Rothschild’s analysis shows that the underlying economics “are far weaker than assumed,” the analyst tells investors in a research note. Graphics processing unit deployments require roughly six times more capital to generate the same “cloud 1.0 value, with risks skewed to the downside,” the firm contends. It believes investors are giving companies “too much benefit of the doubt,” pricing in the heavy spending as if it carried cloud 1.0-level returns, “even though there is no clear path back to those economics.” As such, Rothschild downgraded both Amazon.com and Microsoft to Neutral. It cites lower earnings expectations and the higher capex required to sustain growth for the downgrade of Microsoft.

RECENT TARGET CUTS: More recently, Rothschild & Co Redburn analyst Alex Haissl lowered the firm’s price target on Microsoft to $450 from $500 on January 21. The firm keeps a Neutral rating on the shares.

Meanwhile, Citi trimmed the firm’s price target on Microsoft to $660 from $690 and keeps a Buy rating on the shares. Citi’s reseller survey and partner data points were “more mixed” into Microsoft’s fiscal Q2 results, the analyst tells investors in a research note. Citi expects an Azure beat in Q2 but reduced estimates for Microsoft’s non-Azure businesses on weaker PC forecasts. The stock remains a top mega-cap idea at Citi.

UBS cut the firm’s price target on Microsoft to $600 from $650 and keeps a Buy rating on the shares. The continued ramp of Microsoft’s large Fairwater AI data centers in Atlanta and Wisconsin is emerging as a key near-term catalyst for Azure growth, with the Wisconsin site coming online in Q1, the analyst tells investors. Progress at the Wisconsin build-out supports a higher Azure growth outlook ahead of Microsoft’s January 28 earnings report, UBS says.

Stifel analyst Brad Reback also lowered the firm’s price target on Microsoft to $520 from $640 and keeps a Buy rating on the shares. The firm expects Microsoft to post about 200 basis points of Azure upside, or 39% constant currency growth, inline with buyside expectations, the analyst tells investors in a preview. While fiscal Q3 represents a more difficult year-over-year Azure comp, the firm believes Microsoft can post a similar level of incremental sequential adds as Q3 of FY25, resulting in about 38% year-over-year CC growth guidance given sizable recent datacenter capacity expansions, the analyst added. However, the firm believes the company must get to a point where Azure growth meaningfully outpaces capex growth rates for the stock to effectively re-rate in coming quarters.

SENTIMENT: Check out recent Media Buzz Sentiment on Microsoft as measured by TipRanks.