ii view: demand for Microsoft growth engine slows
Focused on AI provision but with its shares underperforming the Nasdaq 100 index last year. We assess prospects for this US tech titan.
29th January 2026 11:39
by Keith Bowman from interactive investor
Illuminated Microsoft logo at the Mobile World Congress 2025 in Barcelona, Spain. Photo: Cesc Maymo/Getty Images.
Second-quarter results to 31 December
- Revenue up 17% to $81.27 billion (£58.5 billion) year-over-year
- Earnings Per Share (EPS) up 24% to $4.14
- Returned $12.7 billion to shareholders, up from $10.7 billion in Q1
Chief Executive Satya Nadella said:
“We are only at the beginning phases of AI diffusion and already Microsoft has built an AI business that is larger than some of our biggest franchises.
“We are pushing the frontier across our entire AI stack to drive new value for our customers and partners.”
- Invest with ii: Buy International Shares | Most-traded US Stocks | Top UK Shares
ii round-up:
Microsoft Corp (NASDAQ:MSFT) detailed revenue that beat Wall Street forecasts, but with growth at its cloud data business and the hosting of other companies AI software was marginally disappointing.
Group-wide second-quarter revenue to late December rose 17% from a year ago to $81.27 billion (£58.5 billion), pushing adjusted earnings up 24% to $4.14. Analysts had expected outcomes of $80.3 billion and $3.97 per share respectively. Sales at the Intelligent Cloud division rose 29% to $32.9 billion, including growth of 39% for the hardware and software Azure provider compared with 40% in the prior first quarter.
Shares in the Dow Jones and Nasdaq 100 company fell 6% in post results US trading having come into these latest numbers up 15% in 2025. The tech heavy Nasdaq 100 index rose 20% last year. High performance computer chip maker NVIDIA Corp (NASDAQ:NVDA), which regularly power AI software, climbed 39%.
Microsoft operates across the three areas of intelligent cloud, productivity and business processes including its Windows and Office software, as well as personal computing taking in products such as gaming and the X-box.
Capital expenditure hit $37.5 billion during the quarter as Microsoft continued to invest in datacentres, including property and required infrastructure. That was up from $22.6 billion in Q2 a year ago.
Microsoft’s partnership with OpenAI helped power a 110% increase in Remaining Performance Obligations (RPO) from a year ago to $625 billion. RPO is a measure of contracted revenue that has not yet been recognised.
Revenues for the Productivity and Business Processes division, including Windows and Office software, climbed 16% to $34.1 billion.
Sales for the Personal Computing division fell 3% to $14.3 billion, hindered by reduced Xbox gaming demand.
Microsoft returned $12.7 billion to shareholders, up from $10.7 billion in Q1. Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the news.
ii view:
Began in 1975, Microsoft today employs over 220,000 people. Headquartered in Redmond, Washington, Productivity and Business Processes generated most sales of its last financial year at 43%. That was followed by Intelligent Cloud at 38% and Personal Computing the balance of 20%. Geographically, its home US market generated most sales at 51% with the balance of 49% spread globally and including the UK.
For investors, supply constraints for items to build datacentres were previously highlighted and potentially hindering growth. Competition to host AI software on datacentre servers for corporations is intense, with Google owner Alphabet Inc Class A (NASDAQ:GOOGL), AWS owner Amazon.com Inc (NASDAQ:AMZN), International Business Machines Corp (NYSE:IBM) and Oracle Corp (NYSE:ORCL) all fighting hard. The full impact of AI on Microsoft’s core Windows software is yet to play out, while success and returns on the company’s growing capital expenditure is not guaranteed.
- US earnings season: Trump overshadows more strong results
- eyeQ: FAANG stock fires bullish signal
- Investment outlook: expert opinion, analysis and ideas
More favourably, a relationship with OpenAI and growing Remaining Performance Obligations look to support future growth. Microsoft’s domination of corporate software via Windows and Office gives it an ongoing foot in the corporate door to sell other services such as cloud and security provision. Product and geographical diversity exist, while returns to shareholder include share buybacks and a forecast dividend yield of 0.7%.
On balance, and despite ongoing risks, existing corporate software dominance and a consensus analyst fair value estimate above $600 per share will likely see investors stay optimistic about the long term.
Positives:
- Windows operating system holds a dominant market position
- Growing cloud business
Negatives:
- Uncertain economic outlook
- Political concern remains regarding the size and power of tech companies
The average rating of stock market analysts:
Buy
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.