Microsoft Corp. stands at a pivotal moment as it prepares to unveil fiscal second-quarter results after market close on Wednesday, with investors zeroing in on Azure cloud growth rates and escalating capital expenditures. Analysts anticipate revenue of around $80.3 billion, reflecting 15% year-over-year expansion, alongside adjusted earnings per share of $3.91, according to consensus estimates compiled by Bloomberg and others. The quarter ending December 31, 2025, arrives amid surging demand for AI infrastructure, yet capacity constraints and ballooning spending have tempered enthusiasm, contributing to a roughly 10% decline in the stock over the past three months while the S&P 500 edged higher.

Chief among concerns is Azure’s performance, where management previously guided for approximately 37% constant-currency revenue growth, building on the 40% surge posted in the prior quarter. ‘Azure and other cloud services revenue grew 40% driven by demand for our portfolio of services with continued growth across all workloads,’ the company stated in its fiscal Q1 earnings documentation on its Investor Relations site. AI services contributed a hefty 22 percentage points to that growth, underscoring Microsoft’s edge in the generative AI race fueled by its OpenAI partnership.

Yet, the bill for this expansion is steep. Capital spending hit $34.9 billion in Q1, surpassing prior guidance of $30 billion, as the company ramps up data centers, GPUs, and CPUs. Consensus projections point to full-year fiscal 2026 capex nearing $98 billion, more than double fiscal 2024’s $44.5 billion, per an S&P Global report cited in TradingView News. CFO Amy Hood signaled during the Q1 call that ‘capex growth in 2026 would increase from 2025 levels,’ reversing earlier slowdown expectations.

AI Demand Fuels Massive Commitments

Major deals bolster the outlook. Microsoft-backed OpenAI committed to $250 billion in additional Azure services, while Anthropic pledged $30 billion in cloud purchases and up to a gigawatt of computing capacity. These pacts are set to inflate remaining performance obligations, or RPO, with Jefferies analyst Brent Thill forecasting ‘the largest sequential step-up ever’ in Q2, as noted in a Yahoo Finance preview. Q1 RPO already reached $392 billion, signaling robust multi-year visibility.

Microsoft Cloud revenue climbed to $49.1 billion in Q1, up 26% year-over-year, comprising 63% of total sales. Intelligent Cloud, home to Azure, delivered $30.9 billion, a 28% increase. For Q2, the company guided Intelligent Cloud to $32.25 billion to $32.55 billion, implying 26% to 27% growth, per details from the Q1 earnings call transcript. StreetAccount and CNBC surveys peg Azure growth at 39.4% and 38.9%, respectively, as previewed in the focal CNBC article.

Free cash flow rose 33% to $25.7 billion in Q1 despite capex pressures, with $10.7 billion returned to shareholders via dividends and buybacks. Gross margins faced headwinds, dipping in Microsoft Cloud to 68% due to AI infrastructure scaling, though efficiency gains in Azure and Microsoft 365 provided offsets.

Margin Pressures Mount Amid Capacity Race

Investors scrutinize whether accelerating demand outpaces supply. ‘Demand remains significantly ahead of the capacity we have available,’ management noted in Q1 guidance. Q2 capex is expected to rise sequentially, with total fiscal 2026 spend now projected higher than fiscal 2025’s $88.2 billion. This ‘AI tax’ has clouded margins, with cloud gross margins potentially compressing to 66%, as flagged in FinancialContent.

Analyst expectations blend optimism and caution. Visible Alpha projects Azure AI Services revenue at $23.57 billion for fiscal 2026, up from $18.80 billion earlier. On X, users like @VJNCapital highlighted potential RPO surpassing $400 billion, doubling Amazon’s backlog and positioning Microsoft as cloud leader soon. Consensus holds a ‘Strong Buy’ rating, though some hedge funds trimmed amid a 32x-34x forward P/E.

Guidance will prove telling: Q2 revenue outlook was $79.5 billion to $80.6 billion, or 14% to 16% growth, with operating margins flat year-over-year. FX tailwinds add 2 points to growth. Other income and expense, now excluding OpenAI volatility, eyes $100 million.

Strategic Bets on Agents and Copilot

Beyond numbers, focus shifts to AI monetization via Copilot and emerging ‘agentic’ AI. Q1 saw commercial bookings up 112%, driven by Azure multi-million-dollar contracts. Copilot integrates across Microsoft 365, boosting cloud attach rates. KeyBanc surveys indicate VARs expect 30% faster customer cloud spend growth.

Microsoft’s Q1 press release emphasized returning $10.7 billion to shareholders while investing heavily. CEO Satya Nadella’s commentary on the January 28 call, starting 2:30 p.m. Pacific, will address capacity ramps, OpenAI’s public benefit corp shift, and AI ROI. Options traders brace for a 5.09% swing, below the 5.2% average.

The earnings serve as a tech sector bellwether. If Azure tops 38% and capex guidance stays disciplined, it signals green lights for peers, per FinancialContent analysis. With $102 billion in liquidity, Microsoft navigates this high-stakes juncture poised for leadership in AI-driven computing.