Microsoft’s stock took a hit following the release of its earnings report, despite achieving record results.
I mentioned this before last year. Microsoft (MSFT) had a remarkable peak in its share price—$555.45—in late October, though it now finds itself trading close to an eight-month low. After revealing its fiscal 2026 second-quarter results on January 28th, the stock dropped 10.5%.
So, what’s keeping Microsoft under pressure? While the S&P 500 is reaching new heights, there’s uncertainty about whether it will sustain this in 2026.
AI Investments Dampen Microsoft’s Strong Performance
The company’s cloud division is thriving, raking in over $50 billion in revenue last quarter. Overall, Microsoft experienced a 17% revenue increase, with operating income rising by 21% and adjusted diluted earnings per share (EPS) up by 24%. It’s been a challenging quarter, though, with investor worries about the path to profitability for Microsoft’s AI ventures.
During this quarter, Microsoft spent an astonishing $37.5 billion on capital expenditures. A significant portion—about two-thirds—was allocated to short-lived assets like GPUs and CPUs. To put it in perspective, their yearly capital spending has surged from $28.1 billion in fiscal year 2023 to $64.6 billion in 2025. That’s quite a leap, really.
A chunk of this spending is geared towards rapidly investing in AI infrastructure, including their custom AI chip, the Maia 200. Microsoft CEO Satya Nadella emphasized during the earnings call that their silicon efforts aim to deliver superior performance across various hardware generations, particularly compared to Nvidia and AMD.
This quarter, Microsoft added one gigawatt of data center capacity and is gearing up to scale Maia for AI workloads, but this expansion comes with a financial burden. Microsoft’s rationale for such hefty AI investments is rooted in sustained demand; however, increased spending does cut into profits, pulling the company away from its previously capital-light business model.
Slowdown in Software Sector
Microsoft’s AI progress significantly hinges on OpenAI’s ability to manage its backlog. Currently, 45% of Microsoft’s remaining obligations—around $625 billion—are tied up with OpenAI. Not too long ago, positive orders from OpenAI were seen as encouraging. Now, though, some investors are raising eyebrows about whether OpenAI can drum up enough capital to advance its ambitious AI infrastructure, including a planned 10-gigawatt data center.
Interestingly, Oracle’s stock has dropped by 47% from its all-time high, partly due to its dependency on OpenAI to meet cloud commitments. For Microsoft’s substantial AI investments to pay off, OpenAI will need to secure funding or ramp up its revenue considerably to fulfill ongoing contracts.
Adding to the complexity, Microsoft is the largest software company globally, and concerns are swirling in the sector about AI disrupting traditional enterprise software, even as broader tech stocks reach record highs.
Microsoft acknowledges the risks to its software business. In a recent earnings conference, Nadella noted:
With every platform transition, software must be reimagined. A new app ecosystem is forming, where agents are essentially the new apps. Effectively building, deploying, and managing these agents brings its own set of challenges.
Microsoft claims it boasts the widest range of AI models among hyperscalers, supporting the latest iterations of OpenAI’s ChatGPT and Anthropic’s Claude. Many clients utilize both models within Microsoft’s large-scale AI platform, Foundry.
Microsoft’s Stock Offers Long-term Potential
The drop in Microsoft’s stock could signal a solid buying opportunity for long-term investors. While its spending may affect profit margins, it primarily targets AI infrastructure, which could be dialed back if needed down the road.
Given its forward price-to-earnings ratio of 29.1x, Microsoft remains an attractive option for long-term investment. However, it may continue facing pressure until it can convert its commercial balances into tangible earnings.
