Microsoft Price Target Raised Despite Earnings Induced Drop In Stock

Microsoft's stock price (NASDAQ:MSFT) tumbled 6.77% to $449.04 in pre-market trading on Thursday, despite reporting robust quarterly earnings that beat expectations and securing a raised price target from Stifel analysts.

The decline underscores growing market concerns about the software giant's massive artificial intelligence infrastructure spending and capacity constraints limiting its Azure cloud platform's near-term growth trajectory.

The Redmond-based technology company delivered impressive financial results for its October-December 2025 quarter, posting revenue of $81.3 billion—a 17% year-over-year increase—alongside net profit of $30.9 billion, or $4.14 per share. When excluding the impact of its OpenAI investments, profits reached $38.5 billion, or $5.16 per share. The cloud computing division proved particularly strong, generating $32.9 billion in revenue and marking a 29% increase from the prior year period, driven primarily by AI-related demand.

Markets reacted negatively to the results despite the strong headline numbers, with shares initially dropping nearly 5% in after-hours trading before extending losses further in pre-market activity. The stock later recovered somewhat to trade at $481.63, up 1.14 USD from the previous close. The primary concern centers on Microsoft's substantial capital expenditure on AI infrastructure, which has compressed gross profit margins and raised questions about the return timeline on these investments.

Stifel analyst Brad Reback maintained confidence in Microsoft's long-term prospects, raising his price target to $540 from $520 while keeping a Buy rating on the shares. However, Reback's analysis highlighted a critical near-term challenge: capacity constraints are limiting Azure's upside potential, and markets should not anticipate meaningful acceleration in Azure growth over the next several quarters. The analyst noted that management commentary revealed the company must carefully balance datacenter supply allocation among its own applications, research and development initiatives, and customer demand.

The capacity constraint issue represents a double-edged sword for Microsoft. While strong demand for AI-powered cloud services validates the company's strategic direction, the inability to fully capitalize on this demand in the near term creates a growth ceiling. Reback emphasized that for the stock to effectively re-rate in coming quarters, Azure growth must meaningfully outpace capital expenditure growth rates—a threshold the company has yet to achieve given current infrastructure limitations.

CEO Satya Nadella has framed the substantial AI spending as foundational investments for future growth, emphasizing that artificial intelligence remains in the early stages of broader sector adoption. This long-term perspective, while strategically sound, has done little to assuage market concerns about near-term margin compression and the extended timeline required to realize returns on the billions being poured into datacenter expansion and AI infrastructure.

Price Targets

The divergence between Microsoft's strong operational performance and negative market reaction illustrates the challenging environment facing technology companies pursuing aggressive AI strategies. While revenue and profit growth remain healthy, markets are demanding clearer visibility on when AI investments will translate into proportional margin expansion and accelerated growth rates.

The raised price target from Stifel suggests analysts maintain conviction in Microsoft's competitive positioning, but the muted near-term Azure growth outlook and ongoing capacity constraints may continue to weigh on sentiment until the company demonstrates its infrastructure investments are yielding commensurate returns.