Microsoft has just crossed an unwelcome milestone. Following its FY26 Q2 earnings report, the company saw its share price plunge more than 5% in a single day—wiping out roughly $440 billion in market capitalization. It’s now the second-largest one-day value loss in stock market history, surpassed only by NVIDIA’s AI-fueled tumble last year.
The reaction highlights a growing problem for Microsoft: investors are no longer convinced its AI-first strategy will pay off fast enough to justify the cost.
Why was the sell-off so severe
On the surface, Microsoft’s earnings weren’t bad—far from it.
- Cloud revenue surpassed $50 billion
- Total quarterly revenue hit $81.3 billion, up 17% year-over-year
- Operating income rose 21%
- Microsoft 365 Copilot revenue surged 160% year-over-year
- GitHub Copilot usage climbed 75%
Yet none of that mattered.
Wall Street zeroed in on one thing: AI-driven capital expenditure.
Azure growth isn’t keeping up with AI spending
Microsoft’s cloud platform Microsoft Azure grew by 39% this quarter, with guidance suggesting around 37% growth ahead. Normally, those numbers would thrill investors.
But Microsoft’s AI infrastructure spending exploded at the same time.
Capital expenditures jumped close to $40 billion for the quarter, representing roughly 70% year-over-year growth. Much of that spending is tied to massive data center expansion and high-end GPUs—primarily NVIDIA hardware—that depreciate rapidly in enterprise environments.
The concern: returns may not arrive before the hardware becomes obsolete.
The OpenAI dependency problem
Another major red flag is Microsoft’s deep reliance on OpenAI.
While OpenAI’s technology powers Microsoft Copilot and many Azure AI services, it’s also:
- Hugely capital-intensive
- Still largely unprofitable
- Actively seeking tens of billions in additional funding
Investors are increasingly uneasy about Microsoft tying its long-term AI fortunes to a partner that continues to burn cash at an industrial scale.
Why Xbox and Windows barely matter to investors
Despite headlines about Xbox revenue dipping due to an off-year for Call of Duty, those factors barely registered with the market. Consumer-facing products like Windows and gaming are no longer the drivers of Microsoft’s valuation.
For investors, Azure and AI are everything.
That’s why even record engagement in Xbox Cloud Gaming and PC gaming did little to soften the blow.
A growing confidence gap in Microsoft’s AI vision
CEO Satya Nadella has repeatedly emphasized that Microsoft faces more AI demand than it can currently supply. But investors are starting to ask harder questions:
- Where is the scalable, high-margin AI revenue?
- Why are most AI users still on free tiers?
- Can Copilot realistically compete with stronger AI offerings from Google and others?
At the moment, many see Microsoft’s AI products as expensive to build, difficult to monetize, and slower to mature than expected.
Why Google looks safer by comparison
Part of Microsoft’s decline is also relative. Investors increasingly view Google’s AI strategy as more disciplined:
- Tighter control of the full AI stack
- Slower, more measured capital expenditure
- Stronger economics per dollar spent
By contrast, Microsoft’s approach is widely seen as aggressive—almost speculative—betting heavily on a future where AI usage explodes far beyond today’s reality.
The bigger takeaway
Microsoft isn’t failing. Its revenues are strong, its cloud business is enormous, and its AI capabilities are real.
But the market is sending a clear message:
Growth alone isn’t enough when spending grows faster than confidence.
Until Microsoft can clearly demonstrate that its AI investments will translate into durable, high-margin returns—rather than perpetual infrastructure costs - investor skepticism is likely to persist.
The AI gamble could still pay off in spectacular fashion. For now, though, Wall Street is no longer willing to wait quietly.
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