That appears to be the argument, yes. The court isn't claiming authority to send police officers to Ireland and physically seize the data, or authority to force Irish police to conduct a search. Instead they're demanding that Microsoft (a U.S.-based company) produce the requested evidence, if indeed its U.S. staff have access to it (which they probably do).
I think it's problematic from a practical perspective, but I could see how someone could reach that conclusion. Usually jurisdiction of U.S. persons does extend to their overseas assets, e.g. in an investigation of fraud a U.S. court can demand that you turn over your Swiss bank account records, even though these accounts are (of course) in Switzerland.
The main problem IMO is that it puts companies operating in multiple jurisdictions in a bit of a bind. For example, Microsoft Ireland may have responsibility under EU law to not release data except in certain cases, while Microsoft U.S. is required to release it, meaning the company will violate the law somewhere no matter what they do. I'm not sure whether it's possible to avoid that by really firewalling the access, e.g. make Microsoft Ireland an operationally separate subsidiary whose servers cannot be directly accessed by Microsoft USA staff. But that would certainly complicate operations in other ways.