Last week, Microsoft’s stock cratered after it reported its most recent earnings. It grew revenue by 17%, but the stock dropped by more than 10%, wiping out over $400 billion in market value — the worst since the pandemic market rout.
Why are investors punishing a blue-chip company growing revenue at a decent rate, owns the IP rights to the startup Jensen Huang (Nvidia’s CEO) calls “one of the most consequential companies of our time” (OpenAI) and has a great CEO?
Investors are concerned…rightly so?
The stock hasn’t been a world-beater for the past year. In 2025, it gained about 17%, slightly underperforming the S&P 500’s 18%. Investors just haven’t been convinced by the company’s AI strategy. There’s also been the lingering fear that AI would significantly compress its software margins as companies seek cheaper AI substitutes.
Through its relationship with OpenAI and its large enterprise customer base, investors were quite optimistic about the company’s future in 2023, with its stock gaining about 58%, more than double the S&P 500's gains that year.
However, that hasn’t translated to the bottom line as investors hoped. On the consumer side, Bing and Copilot started with vim but were quickly relegated to irrelevance as OpenAI, Anthropic and Google released way better products for both consumers and enterprises.
In the enterprise segment, it’s a glass-half-full-half-empty situation. Microsoft has only been able to persuade just about 15 million paying subscribers for Office 365 Copilot, which isn’t huge in the big picture (in 2024, the company had 400 million Office 365 paying subscribers). You could say businesses aren’t finding the AI features as valuable, so they're buying from competitors instead; the management at Microsoft will argue that it’s already working with Anthropic to significantly improve the quality of Copilot, and those 400 million paying subscribers are captive.
Azure, its cloud division, is also growing at a rapid pace (revenue grew 40% last quarter). The problem here is the cloud unit’s reliance on OpenAI’s business. To Microsoft’s credit, they are trying to break their "OpenAI-only" perception by diversifying. "Our commercial [remaining performance obligations (RPO)] increased over 50% to nearly $400 billion," said Microsoft CEO Satya Nadella in the company's fiscal first-quarter earnings call. Chief financial officer, Amy Hood, added on the same call that Azure demand again exceeded supply across workloads. That is a good thing! Demand is clearly not the problem for this division.
Show me the money…I don’t believe you
2026 is the year when companies must demonstrate they can make money from AI; the market seems generally wary of extraordinary spending without a clear path to making money.
Most hyperscalers are spending unprecedented amounts on building AI infrastructure, and the market is raising the bar for revenue growth to justify these massive capital outlays.
Company | 2025 (TTM) | 2026 Forecast (High-End) | Capex Growth (%) |
Alphabet | $91.4B | $185.0B | +102.4% |
Meta | $72.22B | $135.0B | +87.0% |
Microsoft | $83.094B | $145B | +74.5% |
Amazon | $131.82B | $200.0B | +51.7% |
It’s not just Microsoft getting punished. Alphabet (Google’s parent company) was sold down in after-hours trading into the following day's session as investors digested the high Capex forecast.
The market is suffering from an AI-induced fever and tech firms from an AI-identity crisis. Investors are asking them to show returns on their AI spending and, at the same time, are scared that AI tools are eating their lunch.
What’s the salve to soothe the market’s fever? Grow revenue even faster!
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