It was an earnings report that contained some stunning numbers: Microsoft reported crossing a significant $50 billion quarterly revenue milestone for its cloud business, and said its demand backlog had more than doubled, to $625 billion, with a boost from OpenAI. But the tech giant’s stock tumbled nearly 5% in after-hours trading, following a second quarter earnings release that showed a slowdown in Azure revenue growth and capacity constraints that Microsoft admitted will extend to “at least” the end of its fiscal year in June.

During the earnings call with analysts after market close on Wednesday, chairman and CEO Satya Nadella and chief financial officer Amy Hood were pressed on investor fears over a slowdown in revenue growth for the Azure platform amid soaring capital expenditures—both signs that the company is struggling to keep up with AI demand. Those two figures combined have given rise to questions about whether Microsoft can build out computing capacity as fast as planned, and if that issue will further limit Azure’s growth. Essentially, investors are worried they might be seeing the first blush of a yellow flag.

“One of the core issues that is weighing on investors is capex is growing faster than we expected, and maybe Azure is growing a little bit slower than we expected,” said Keith Weiss, head of U.S. software research at Morgan Stanley, during the call. “That fundamentally comes down to a concern on the [return on investment], on this capex spend over time.”

To level-set: Microsoft spent $34.9 billion on capital expenditures in the first quarter of fiscal 2026 alone, with roughly half dedicated to assets including GPUs and CPUs, which are the chips it uses in PCs, servers, and the Azure data centers. In Q2, capex was roughly $37.5 billion, which brought the first half total to $72.4 billion, signaling significant infrastructure spending. In the first quarter, Hood told investors the company was seeing growing demand and a rising RPO balance that meant it would increase its chips spending.

Meanwhile, Azure growth flattened out, falling from 40% in the first quarter to 39% in the second. “We continue to see strong demand across workloads, customer segments and geographic regions, and demand continues to exceed available supply,” said Hood during the call.

The latest earnings figures have investors thinking about capacity constraints, and ROI questions.

Hood pushed back on the idea that investors should draw a direct correlation between capital expenditures and Azure’s revenue figures. “Sometimes I think it’s probably better to think about the Azure guidance that we give as an allocated capacity guide about what we can deliver in Azure revenue,” Hood told Weiss in response to his question.

“The first thing we’re doing is solving for the increased usage and sales and the accelerating pace of the M365 Copilot, as well as GitHub Copilot,” she said. Then, Microsoft invests in R&D and product innovation, which are both long-term investments. “You end up with the remainder going toward serving the Azure capacity that continues to grow in terms of demand,” said Hood.

If Microsoft had allocated all new GPUs from the first and second quarters exclusively to Azure, Hood stated, Azure’s growth would have been well above the 39% Microsoft reported.

Nadella underscored Hood’s point, noting that investors should evaluate performance across the entire AI enterprise. He said investors should “obviously” consider Azure, but shouldn’t forget about Microsoft 365 Copilot, Github Copilot, Dragon Copilot, and Security Copilot, all of which incorporate AI.

“Acquiring an Azure customer is super important to us, but so is acquiring an M365, or a GitHub or a Dragon Copilot [customer],” said Nadella. He said compute spending also functions as an R&D-like investment.

“You’ve got to think about compute as also R&D, and that’s sort of the second element of it,” said Nadella. “And so we’re using all that, obviously, to optimize for the long term.”

Still, investors are likely to remain concerned that the ongoing capacity constraints could prevent the tech giant from converting its record RPO backlog, reported in filings in the form of remaining performance obligations (RPO), into revenue growth as fast as Wall Street expects. In addition, investors will be looking next quarter for signs that the infrastructure spending is justified by revenue growth.

Despite the investor concerns and the after-hours stock drop, much of the news from the latest earnings report was positive. Microsoft reported second quarter revenue of $81.3 billion, up 17% from $69.6 billion a year ago, leapfrogging past the company’s guidance of $79.5 billion to $80.6 billion. Operating income grew 21% to $38.3 billion from $31.7 billion, while diluted earnings per share rose 24% to $4.14 from $3.35. Moreover, the cloud business cracked $50 billion in quarterly revenue for the first time ever, hitting $51.5 billion, growth of 26% year over year.

RPO was up 110% year over year to $625 billion, driven in part by a $250 billion commitment from OpenAI that was announced in October. Hood said investors shouldn’t worry about the exposure to one of Microsoft’s major partners, pointing out that roughly $344 billion of the RPO came from a diverse set of other customers. RPO from that set of customers grew 28% year over year, which Hood said was larger than most of Microsoft’s peers.

Some “55% or roughly $350 billion is related to the breadth of our portfolio, breadth of customers, across solutions, across Azure, across industries, across geographies,” said Hood. “Frankly, I think we have super high confidence in it.”