Microsoft delivered a solid quarterly earnings beat, but shares moved sharply lower as investors focused on cloud growth expectations and rising capital spending tied to artificial intelligence infrastructure.
BNN Bloomberg spoke with Rishi Jaluria, managing director of software research at RBC Capital Markets, about Azure growth, AI monetization trends and why higher capital expenditures may be overshadowing strong underlying fundamentals.
Key Takeaways
- Microsoft exceeded revenue and earnings expectations, but elevated investor expectations drove a sharp selloff following results.
- Azure cloud growth remained strong, with demand exceeding supply as capacity constraints limited further acceleration.
- Higher capital expenditures reflect efforts to expand AI infrastructure, creating near-term margin pressure despite long-term growth potential.
- AI monetization is expanding across multiple Microsoft products beyond cloud consumption, supporting recurring revenue growth.
- Investor focus across large-cap technology remains on whether AI-driven revenue can outpace rising infrastructure and operating costs.
Read the full transcript below:
ANDREW: Microsoft is out of favour this morning. A lot of investors seem to think that, sure, this is a fairly stable tech stock — they have a lock on business software around the world — but the shares are sliding about 11 per cent. Let’s get more from Rishi Jaluria, managing director of software at RBC Capital Markets. Rishi, thanks very much for joining us. Why do you think investors are displeased with Microsoft today?
RISHI: Yeah, thanks so much for having me. Look, I think we’re in a very fickle market. If you take a step back, this was a solid earnings report. If you had told me that Microsoft would be trading at about 22 times GAAP earnings — and maybe lower than that with today’s pullback — and put up a quarter like this, I would have thought the stock would be up.
Now, I think there are two things weighing on investors here. Number one, Azure growth this quarter was solid, but maybe a little bit light relative to expectations, and it did show a point of deceleration. They remain capacity constrained, and they definitely signalled that overall Azure growth would have been meaningfully higher if they were at parity.
The second issue is capital expenditures. They’re talking about raising capex, because if you want to get out of being capacity constrained, you have to build more. So capex numbers are going higher, and I think, as we’ve seen in this market, investors don’t particularly care for that mismatch between investing now and revenue taking time to materialize. That said, I think this is creating a good buying opportunity for us.
ANDREW: It’s really amazing. When you’re posting roughly 38 per cent revenue growth during the quarter, investors are still looking for something even more exponential, aren’t they?
RISHI: I think that’s right. With everything going on around AI and all the spending, investors are looking for accelerating growth. But if you take a step back, that’s about US$9 billion of Azure annual recurring revenue added sequentially. That’s a very high number, especially when you’re capacity constrained.
But in this kind of market, it tends to be very short-term focused, often on just one number. For those of us willing to be longer-term investors and think through the long-term total addressable market opportunity, you can look through the noise. There’s a lot more to like in this earnings report.
ANDREW: Microsoft is deeply involved with OpenAI. Is that a worry, given concerns about OpenAI’s debt levels and heavy spending?
RISHI: I think there are two important points here. First, Microsoft disclosed that OpenAI represents about 45 per cent of commercial remaining performance obligations, which is a good measure of future backlog and revenue to be recognized. But they’re not including all of OpenAI in that figure. They’re risk-adjusting it, and the longer the duration, the more conservative the adjustment. So I think they’re being quite conservative in what they include in that backlog number.
Second — and I don’t think this is well understood by the market — all of these applications where we’re seeing early traction, whether it’s Microsoft 365 Copilot, GitHub Copilot, Security Copilot or Dynamics, are built in a modular way that is not entirely dependent on OpenAI. You can use Anthropic models, open-source models like Llama or Mistral.
As a result, Microsoft’s fortunes are not entirely dependent on OpenAI. They do have a strong arrangement — research rights until 2028 and exclusive IP rights to the OpenAI API until 2032 — but their future success does not hinge on OpenAI alone. Even if OpenAI does not meet some of the loftier expectations, Microsoft can still succeed. And despite all the noise, OpenAI remains one of the leading frontier model providers, alongside Anthropic and Google.
ANDREW: I’m not sure if you saw this story — I think only Forbes is reporting it so far — but OpenAI is reportedly working on a new social network that would require biometric identification to keep bots out.
RISHI: Yeah, it’s interesting. One thing that differentiates OpenAI is that they’re making very big bets across many areas. They’re not just a model provider. They’re building domain-specific agents, getting into health care, consumer applications, potentially social media, and even advertising. Those are very large bets.
If a company aspires to be one of the largest in the world, you have to make those bets. Some will pay off, some won’t. In many ways, it actually reminds me of Microsoft. Microsoft got into social media with LinkedIn and turned it into a much larger asset. They’re dominant in enterprise software, infrastructure, security, developer tools, gaming and search. Bing may not be widely used, but it’s still a very large business.
It also raises an important issue around how we differentiate between what is AI-generated and what is human-generated. That line is getting blurrier every day, and verified content and verified actors are likely to become increasingly important.
ANDREW: And you would be a buyer of Microsoft right now, with a target of US$640?
RISHI: I would. I think this pullback is an opportunity. The market is being, candidly, pretty irrational on Microsoft right now. Azure performance was strong, and management has been conservative in its assumptions.
We’re seeing strong traction in Microsoft Fabric, which reached US$2 billion in annual recurring revenue in less than two years. Microsoft 365 Copilot, GitHub Copilot and other offerings continue to gain adoption. There’s a lot to like here. They’re preserving margins despite all this spending, and at roughly 22 times GAAP earnings, this looks like a gift to us.
ANDREW: Rishi, thanks very much for your time. We appreciate it.
RISHI: Thanks for having me.
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This BNN Bloomberg summary and transcript of the Jan. 29, 2026 interview with Rishi Jaluria are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
