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Earnings Options Strategy | Microsoft's stock price rebounds before earnings! Will the balance between cloud business growth and capital expenditure determine post-earnings movement?

$Microsoft (MSFT.US)$ Microsoft is set to release its fiscal year 2026 second-quarter earnings (corresponding to the natural months of October to December 2025) after the market closes this Wednesday (early morning Beijing time on January 29, 2026). Analysts expect Microsoft to achieve revenue of $80.278 billion in Q2 2026, a year-over-year increase of 15.29%, with an expected earnings per share of $3.850, reflecting a year-over-year growth of 19.2%.

Looking back at the past year's trading, Microsoft's stock price has experienced a significant roller-coaster ride. In the first half of 2025, driven by the wave of generative AI, Microsoft's stock price repeatedly hit new highs. However, starting from October, market sentiment shifted and Microsoft's stock began to show signs of pullback.

The core reason for this round of adjustments was the unexpected surge in capital expenditures (CapEx) in the previous quarter's financial report.Investors observed massive funds flowing into AI infrastructure construction and began to worry that high costs would severely drag down the company’s short-term profitability.

From a technical perspective, Microsoft's stock price has formed a relatively effective support level near $455, rebounding over 3% last Friday.Can this Wednesday's earnings report validate Microsoft's balance between high investment and high growth?

Intelligent Cloud Business: The Core Engine Determining the Rebound's Height

The Intelligent Cloud division is currently Microsoft’s revenue pillar and the business segment receiving the most attention from investors. This division covers Azure public cloud services, server products, and enterprise services. Over the past few quarters, the Intelligent Cloud division has accounted for more than 40% of Microsoft’s overall revenue, making it the absolute main driver of the company’s performance growth. Performance of Azure and other cloud services directly determines the market's valuation logic towards Microsoft.

The market currently holds extremely high expectations for Azure's performance in Q2.According to Bloomberg consensus estimates, the revenue growth rate for Azure and other cloud services in Q2 is expected to reach 35.94%, reflecting strong confidence in the continued demand for enterprise-level AI.

Data source: Bloomberg, compiled by Futubull; unit: million USD

In a recently published in-depth report, UBS Group pointed out that Microsoft's Fairwater AI data center in Wisconsin is undergoing a critical phase of operational improvements. The commissioning of this project indicates that Microsoft has made substantial progress in addressing computational bottlenecks.UBS analysts believe that with the release of new capacity, Azure's business is expected to achieve faster growth this year.Azure’s growth over the past few quarters has been somewhat constrained by GPU supply and data center capacity limitations. The launch of the Fairwater data center will effectively alleviate this situation and provide the physical infrastructure necessary for Azure’s accelerated growth.

The accelerated adoption of enterprise AI tools is another major driver of Azure’s growth. From the early proof-of-concept (POC) stages, many enterprise customers have begun transitioning to full-scale deployment and application implementation. The widespread adoption of Microsoft 365 Copilot has driven consumption of underlying Azure OpenAI services. Traditional industries such as finance, healthcare, and manufacturing are accelerating the migration of their workflows to Azure’s cloud to leverage its integrated AI capabilities. Q2 earnings are expected to fully benefit from this transition process, with Azure’s net dollar retention (NDR) likely to remain at healthy levels.

The intelligent cloud business is not without concerns. Microsoft faces fierce competition from AWS (Amazon Web Services) and Google Cloud. After a brief adjustment period, AWS has recently regained its growth momentum through proprietary chips and a vast customer base; Google Cloud, leveraging iterations of the Gemini model, has launched an aggressive offensive against Azure in the AI-native applications space. The price wars and technological arms race among the three major cloud vendors could put pressure on Azure’s profit margins.

Capital Expenditure Outlook: From 'Cost Drag' to 'Growth Foundation'?

Microsoft’s capital expenditure is primarily directed toward AI infrastructure construction, including the global expansion of data centers, procurement of high-end GPUs from NVIDIA, and upgrades to server clusters. This forms the core investment supporting the continuous growth of the Intelligent Cloud segment and is a necessary cost for Microsoft to maintain its leadership in AI.

Microsoft has significantly adjusted the pace of its capital expenditures over the past year. In early 2025, Microsoft temporarily slowed the expansion of its self-built data centers and instead sought to expand capacity through leasing or partnerships. Starting last quarter, Microsoft’s management increased investment in self-built infrastructure, but this directly led to a sell-off in the stock price since October, as investors worried that excessive spending would erode free cash flow.

Microsoft's total capital expenditure for the fiscal year 2026 may exceed $120 billion.For the Q2 2026 earnings report, investors need to shift their perspective from solely focusing on the scale of expenditures to evaluating expenditure efficiency.

Data source: Bloomberg, compiled by Futubull; unit: million USD

Q2 performance may benefit from newly added computing capacity. Take, for example, the previously mentioned data center project in Wisconsin, which is expected to reach 500 megawatts by mid-2026. Additionally, Microsoft announced earlier that new data centers in locations such as India are scheduled to go live by mid-2026. These infrastructure projects have long construction cycles, but once operational, they will translate into tangible revenue support. Microsoft's management has previously stated that Azure’s demand continues to outpace existing capacity. This means that the increase in capital expenditure is essentially making up for future revenue growth.

In this earnings report, investors need to assess how capital expenditure supports Azure's growth. If capital expenditure continues to grow significantly and Azure's growth rate can match or even exceed the anticipated 35.94%, the market will tend to view these investments as sound and high-return. Conversely, if capital expenditure remains high while Azure's growth slows, skepticism about Microsoft 'overspending' will intensify.

Microsoft and OpenAI: The Beginning of a MaaS Transition

The relationship between Microsoft and OpenAI underwent subtle changes over the past quarter. Looking back at the previous quarter, Microsoft's investment in OpenAI resulted in a net profit impact of nearly $3.1 billion.However, during the Q2 earnings period, Microsoft did not inject new large-scale funds or make additional investments,making this quarter's net profit figures more pure and better reflecting the true profitability of its core business.

OpenAI remains one of Azure's largest external clients, with its model training and inference workloads contributing significant cloud consumption revenue to Azure. The recent agreement reached between both parties legally and commercially locks in the future relationship between Microsoft and OpenAI, ensuring Microsoft’s priority commercialization rights for OpenAI technology for the foreseeable future.

Microsoft is proactively reducing its reliance on a single model provider.Microsoft CEO Satya Nadella publicly outlined Microsoft's new AI strategy at the 2026 Davos World Economic Forum: instead of excessively chasing the largest single model, the company will shift towards multi-model orchestration, system building, and practical application implementation.

Nadella’s statement sent an important signal. Microsoft is building an open MaaS (Model as a Service) platform. Azure AI Studio not only provides OpenAI models like GPT-4 but also integrates Meta’s Llama series, Mistral, and Microsoft’s self-developed Phi series of smaller models. The 'multi-model' strategy helps Microsoft avoid risks associated with relying on a single model technology path while meeting the differentiated needs of different enterprise customers in terms of cost, latency, and privacy.

Outlook for other business units: Stability in the productivity division, PC recovery

Beyond cloud and AI, Microsoft’s 'Productivity and Business Processes' division remains a cash cow. This division includes the commercial version of Office, LinkedIn, and Dynamics 365.Growth is primarily driven by the natural increase in subscription numbers and the upward shift in subscription price tiers.

As Microsoft 365 Copilot features continue to improve, more enterprise customers are willing to pay an additional $30 per user per month. The increased penetration of this high-value-added service will directly boost the division’s ARPU (Average Revenue Per User).

The 'More Personal Computing' division mainly involves Windows OEM revenue, Xbox gaming business, and Surface hardware. As the global PC market enters a new replacement cycle, especially with the promotion of AI PCs, Windows OEM revenue is expected to end negative growth and enter a recovery phase.

Technical analysis and pre-earnings options strategy

From a technical analysis perspective,Microsoft's stock price has recently formed a relatively effective support level near $455.In last Friday's trading session, Microsoft's stock price rebounded by 3%.

Microsoft's current put-call ratio is 0.66, and its implied volatility (IV) stands at 32.87%, which is lower than other major tech stocks, implying that options are relatively cheaper.

Considering the current technical support level and the upcoming earnings release, investors who are optimistic about Microsoft’s future performancecan consider adopting a combination strategy of 'selling puts (Sell Put) + buying calls (Buy Call)' (a variant of the Risk Reversal strategy), which is suitable for investors willing to open long positions in the stock near the $455 support level.

Risk Reversal strategy profit and loss chart; Source: Marketchameleon

The specific operational logic is as follows: Investors can sell short-term puts near the support level. Due to typically higher implied volatility (IV) before earnings releases, selling puts can generate premium income. Subsequently, this premium can be used to buy out-of-the-money or higher strike price calls.

The advantage of this strategy lies in significantly reducing the capital cost of constructing a bullish options strategy. If Microsoft's stock price surges after the earnings release, the calls held by investors will quickly appreciate, and since the cost is extremely low (covered by the premium from selling puts), the leverage effect will amplify gains. If the earnings disappoint and cause a stock price drop, as long as the decline does not fall too far below the support level, investors may use the sold puts to 'buy the dip' at the support level.

This strategy offers both offensive and defensive flexibility, making it highly suitable for the current market environment characterized by 'high volatility expectations + strong bottom support' in technical and event-driven trading.

For those investors who are cautious about the subsequent trend or believe that the upside potential of the stock price is limited, a covered call strategy would be a more prudent choice.While holding the underlying stock, selling a Call option at a higher resistance level can generate premium income to enhance overall position returns and hedge against downside risks to some extent.

Microsoft Q2 2026 Earnings Live Broadcast (Simultaneous Interpretation)

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Risk Warning

An option is a contract that gives the holder the right, but not the obligation, to buy or sell an asset at a fixed price at any time on or before a specific date. The price of an option is influenced by several factors including the current price of the underlying asset, the strike price, time to expiration, and implied volatility.

Implied volatility reflects the market’s expectation of the future volatility of an option over a certain period. It is data derived inversely from the BS option pricing model and is generally considered an indicator of market sentiment. When investors anticipate higher volatility, they may be willing to pay more for options to hedge risks, resulting in higher implied volatility.

Traders and investors use implied volatility to assessoption pricesthe attractiveness, identify potential mispricing, and manage risk exposure.

Disclaimer
This content does not constitute any offer, solicitation, recommendation, opinion, or guarantee for any securities, financial products, or tools. The risk of loss in trading options can be substantial. In some cases, losses may exceed the initial margin deposited. Even if you set contingent orders such as 'stop-loss' or 'limit' orders, these may not prevent losses. Market conditions may prevent these orders from being executed. You might be required to deposit additional margin within a short period. If you fail to provide the required amount within the specified time, your open positions may be liquidated. However, you will still be responsible for any shortfall in your account. Therefore, before trading, you should study and understand options and carefully consider whether such trading is suitable for you based on your financial situation and investment objectives. If you trade options, you should be familiar with the procedures for exercising options and the rights and obligations upon exercise and expiration. Option trading involves extremely high risks and is not suitable for all investors. Investors should read carefully before engaging in any options trading strategy.Characteristics and Risks of Standardized Options。

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