Microsoft’s stock dropped by 4% in after-hours trading, even though it beat expectations for the fiscal second quarter of 2026. The company reported adjusted earnings per share (EPS) of $4.14 on a revenue of $81.3 billion. This EPS was $0.22 higher than estimates, and the revenue showed a 17% year-over-year increase, exceeding expectations by $1 billion. The cloud business grew by 26% year-over-year, reaching $51.5 billion. The Productivity & Business Processes segment increased to $34.1 billion, up 16% from last year. Intelligent Cloud revenue hit $32.9 billion, marking a 29% rise year-over-year, driven by a 39% sales growth in Azure and other cloud services. On the downside, the More Personal Computing segment saw revenues of $14.3 billion, down 3% from the previous year, mainly due to lower Xbox revenue. Microsoft raised dividends and share buybacks by 32% year-over-year, totaling $12.7 billion. The 4% drop in stock price, despite strong earnings, shows that investor expectations were very high. This is a typical “sell the news” reaction, seen before when stocks have risen sharply, like Microsoft did in the last quarter of 2025 with over a 15% gain. With the Nasdaq 100 near all-time highs, this pullback may reflect market feelings more than the company’s performance. The strength in the cloud business is a crucial sign for the upcoming weeks. Azure’s 39% growth is important, especially since industry reports from late 2025 indicated it was gaining market share against competitors like Amazon Web Services. This core growth area is speeding up, supporting a positive long-term outlook. The decline in the Personal Computing division appears to be a minor issue. The 3% drop is mostly linked to Xbox, reflecting a broader slowdown in the consumer gaming market observed in 2025. This issue seems contained and does not impact Microsoft’s profitable enterprise and cloud businesses. For traders, the stock price drop creates a chance in the options market where implied volatility might be higher. Selling cash-secured puts at lower strike prices is a smart strategy. This approach allows traders to collect higher premiums due to market fears, while also setting up a potential entry point at a better price if the stock continues to fall. Alternatively, buying call options with expiration dates in February or March 2026 could be a good strategy to bet on a recovery. This method takes advantage of the lower price to prepare for a possible short-term rebound as the market looks past the initial reaction and focuses again on the impressive 29% growth in the Intelligent Cloud segment. Historically, similar knee-jerk responses to fundamentally strong companies have often corrected themselves in just a few weeks.

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