Microsoft (MSFT) Earnings On Deck: Azure Momentum, AI Investment Curve, Cash Returns

 

• Microsoft (MSFT) is set to report their Q2 FY2026 earnings tomorrow, January 28, after market close.

• Analyst consensus expectations call for an earnings per share (EPS) of $3.91 on revenue of $80.3 billion.

• The key pieces for MSFT on this call, aside from their core numbers and forward guidance, are how much AI capex will increase this year, and how quickly the developments from those expenses can be converted into revenue. 

 

Baseline: What 2025 Set Up for 2026

Microsoft had a volatile but strong 2025 calendar year in the stock market, sinking as low as -16.9% on the year following the Liberation day selloff, before rising to highs of +33.7% on the year in late July, and then sinking again to ultimately log a +13.7% gain on the year as a whole. Microsoft operates on a fiscal year starting on July 1 and ending on June 30, which puts them currently in Q3 of the 2026 fiscal year, set to report their Q2 earnings tomorrow. 

 

Last quarter (Q1 FY2026), Azure grew about 40% in constant currency as AI demand stayed hot, and management reiterated their Q4 FY2025 stance that capital expenditure (capex) on AI would continue to increase. Reports through 2025 highlighted record spending on data center development and an “invest now, monetize later” stance for Copilot and other AI projects. 

 

Recent analyst commentary puts Microsoft’s AI and data center capex run-rate in the ballpark of $30 billion per quarter, with FY2025 AI and infrastructure spending coming in at around $80 billion, though framing varies by source and period. 

 

Near-Term Catalysts to Watch

Is Azure Still the Engine?

Azure is Microsoft’s biggest cash cow, and is largely overlooked by the masses amid Microsoft’s software, hardware, and AI revenue streams. Investors will key in on whether Azure can hold the high 30% to low 40% growth clip that it touched in Q1, and on any information about AI workload mix, particularly as it pertains to training vs. inference. If AI trajectory cools or outlook softens, that would be a bearish variable, and vice versa. 

 

Copilot Cash-In vs. Capex Cash-Out

Like with Meta, a contemporary to Microsoft in the AI space who also reports earnings tomorrow, investors are very curious about the timeline of AI monetization while spending remains high. How fast paid Copilot usage, including Copilot upsells within GitHub and AI add-ons, show up in revenue vs. the very large capex outlays will be a critical piece of this call. Any concrete adoption metrics, renewal anecdotes, or attach-rate commentary will be heavily scrutinized against the capex curve. 

 

Capacity First, Returns Next

Along with the path to AI monetization, investors will also want to hear if there are any changes planned to AI spending. Any commentary on the 2026 capex path, power and cooling constraints, and GPU or accelerator availability could move shares. If leadership says that capex is beginning to “bend the curve” on returns, that would be a bullish variable, and vice versa. Recent analyst commentary has flagged that an increase in capex is more likely, but not a sure thing. 

 

Office/LinkedIn/Dynamics to the Rescue?

Amid all of the AI hullabaloo, one thing never changes: the company still needs to make money. Any gross margin takes, including AI startup costs, the mix between cloud and hardware revenue, and the impact of foreign exchange rates will be important. Additionally, commercial resilience from software products like Office, LinkedIn, and Dynamics will come into play, along with Windows seasonality to offset heavy AI investments. 

 

What the Guide Implies for FY26

And, of course, as is true with any earnings call for any company, forward guidance will matter. Any commentary on Q3’s goalposts for revenue, Azure growth, operational expenditure, and capex will set the tone for the near-term. Clear bridges to revenue through the “invest now, monetize later” mindset are what bulls want to hear. 

 

The 2026 Roadmap

Copilot at Scale: Price, Packaging, Payback

The central long term question for Microsoft, as previously outlined, is whether Copilot and AI services can scale revenue and margins into the 2026 calendar year and beyond. Any information on whether price or packaging tweaks, enterprise standardization, and AI are driving usage in core suites is critical to finding an answer. 

 

Capacity = Revenue: Build, Buy, Partner

Any updates on accelerator supply, power buildouts, and partnerships (namely with OpenAI, but all partnerships apply) will help to frame how much AI demand Microsoft can capture compared to their rivals. Recent reporting underscores how tightly earnings now track to cloud and AI capacity.

 

Buybacks, Dividends, and the Capex Bill

Investors know that capex will be elevated throughout this calendar year - though by exactly how much remains to be seen - but will want to parse buybacks and dividends against the free cash flow outlook. Any shift in balance here could nudge the multiple, even if there are no changes in Microsoft’s core fundamentals.

Gus Downing is host of the tastylive Network show Risk and Reward. @GainsByGus
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