Microsoft (MSFT 3.90%) stock fell 4.6% through 11:15 a.m. ET Thursday despite beating on both top and bottom lines in its fiscal Q3 2026 earnings report last night. Heading into the reportanalysts forecast Microsoft to earn $4.05 per share on sales of $81.3 billion. In factMicrosoft earned $4.27 per share on sales of $82.9 billion.
So what went wrong?
Image source: Microsoft.
Microsoft Q3 earnings
At first glancevery little went wrong for Microsoft in Q3. Sales surged 18% year over yearand both operating and net profit grew even more stronglyup 20% and 23%respectively. Earnings per share likewise grew 23%in line with net profitindicating minimal stock dilution. Sales at the company's growing artificial intelligence division more than doubledup 123% year over year to $37 billion.
Yesyou read that right. Microsoft today already gets nearly half its revenue from AI -- but that's bad news as well as good.
NASDAQ: MSFT
Key Data Points
Microsoft's big AI problem
Heavy investment "delivering cloud and AI infrastructure and solutions that empower every business to eval-max their outcomes in the agentic computing era," as CEO Satya Nadella put itis driving AI revenue for Microsoft. But this comes at a cost. Microsoft generated $46.7 billion in operating cash flow in Q3 -- then spent $30.9 billion of that on capital investment.
This reduced free cash flow for the quarter to $15.8 billiona 22% decline from last year's Q3.
Year-to-dateMicrosoft has generated $47.4 billion in positive free cash flowmuch less than its reported $98 billion net profit. On course to generate perhaps $63.2 billion in FCF this yearthis would value the $3.2 trillion stock at a heady 50x FCF.
Even with 23% growththat's a high price to pay.
