Wall Street isn’t punishing Microsoft because it stumbled this earnings season.
It’s reacting because the company didn’t exceed expectations by enough — especially on Azure, in a market obsessed with AI upside.
According to Morgan Stanley, that response misses the bigger picture.
“Yes, Azure came in one point below Street expectations, but at 21x 2027 earnings, the valuation ignores what actually matters,” the bank wrote.
Microsoft’s fiscal Q2 results were strong across the board: revenue rose 17%, operating margins expanded to 47%, and earnings climbed 21% on a constant-currency basis. Even excluding OpenAI-related gains, performance held up.
Azure grew 38% year over year, beating Microsoft’s own guidance but falling short of the 40% growth many investors were hoping for — and that single metric ended up overshadowing everything else.
Morgan Stanley argues investors are focused on the wrong signal.
Microsoft’s backlog — officially called residual performance obligations — surged 110% to $625 billion, pointing to accelerating future revenue. Even excluding OpenAI contracts, backlog still rose 28%.
Microsoft executives also made clear that Azure’s growth is being capped by supply, not demand. GPU shortages mean capacity is being redirected toward internal AI products like Microsoft 365 Copilot and GitHub Copilot, which would have pushed Azure growth above 40% if fully allocated.