Microsoft Falls 25% as AI Spending Surge Raises Growth Questions

Microsoft MSFT is increasingly sitting at the center of two pressures that could define its near-term trajectory, as the company pushes deeper into artificial intelligence spending while investors begin to question how quickly those investments may translate into stronger revenue growth. At the same time, concerns are emerging that AI-native players such as Anthropic and OpenAI could move closer to end customers, potentially reshaping how software is consumed and creating pressure on Microsoft's core businesses. Jonathan Cofsky of Janus Henderson noted that some customers could choose to engage directly with AI vendors rather than pay Microsoft, a shift that might weigh on pricing and margins if it gains traction.

That tension is starting to show up in the stock. Shares are down about 25% in the first quarter, putting Microsoft on track for its weakest quarterly performance since the 2008 period and making it the weakest performer among the Magnificent Seven, which have also declined but by a smaller margin. The backdrop is a sharp increase in capital intensity, as Microsoft continues to invest heavily to keep pace in the hyperscaler race. Capital expenditures, including leases, are projected to rise from about $88 billion in fiscal 2025 to $146 billion in fiscal 2026, with further increases expected in fiscal 2027 and 2028. Investors appear to be taking a more cautious view of that spending, particularly as Azure growth showed a slight deceleration in the most recent quarter and Copilot has yet to gain meaningful traction, prompting internal adjustments to improve the product.

The longer-term outlook, however, remains a point of debate rather than consensus. Ben Reitzes of Melius Research suggested that Azure's upside could be capped as Microsoft works through issues related to Copilot and its own models, while also flagging potential risks across other segments. In contrast, Bank of America's Tal Liani recently reinstated coverage with a buy rating, pointing to what he described as durable multi-year growth across cloud and AI. The stock's valuation has compressed to less than 20 times forward earnings, the lowest level in years, even briefly trading at a discount to the broader market, which could indicate expectations have already reset. With most analysts still maintaining positive ratings and projecting substantial upside, the current setup may come down to whether investors view the present concerns as structural or as a temporary phase that could reward patience.