Microsoft Corporation's stock experienced a decline on Friday, closing at $386.92, a 0.9% drop from the previous day's close of $390.34. The slide reflects growing investor unease about the company's escalating capital expenditures on artificial intelligence infrastructure, which are projected to exceed $40 billion in the fiscal fourth quarter.
The market's reaction comes amid broader concerns within the technology sector following Oracle's announcement of aggressive AI spending plans. Oracle's move has prompted investors to scrutinize the return on investment for such massive outlays, particularly as Microsoft's capital expenditure for calendar 2026 is forecast to reach approximately $190 billion, including $25 billion tied to higher component prices.
Microsoft's Chief Financial Officer Amy Hood provided a cautious outlook, noting that the company's growth is becoming increasingly capital intensive. She indicated that Microsoft expects to remain capacity-constrained into 2026, with cloud gross margins projected to decline to around 64% due to AI investments and increased usage of GitHub Copilot.
The stock's performance stands in stark contrast to the broader market, with the S&P 500 gaining 1.8% and the Nasdaq composite rising 2.5% on Thursday, while Microsoft shares fell 1.77% that same day. Barron's reported that the stock has now declined for six consecutive sessions, reflecting persistent worries about AI spending across major tech companies.
Despite the near-term headwinds, Microsoft's fundamental business remains strong. The company reported revenue of $82.9 billion, up 18% year-over-year, with operating income of $38.4 billion and diluted earnings per share of $4.27. Microsoft Cloud revenue surged 29% to $54.5 billion, while Azure and other cloud services grew 40%. CEO Satya Nadella highlighted that the AI business has surpassed an annual revenue run rate of $37 billion, representing 123% growth.
Investors are focusing on three key metrics for the upcoming fiscal Q4 report: Azure's constant-currency growth, expected to be around 39% to 40%; Copilot paid-seat counts and average revenue per user; and remaining performance obligations, which stood at $627 billion in Q3. Bulls view the large RPO as a strong indicator of future revenue, but if capex growth outpaces revenue expectations, the stock may remain under pressure.
Adding to the challenges, Microsoft's consumer business faces headwinds. Reports indicate that the Xbox unit is planning major layoffs and budget cuts next month, following a 1% decline in the More Personal Computing segment and a 5% drop in Xbox content and services revenue in Q3.
Currently trading at a price-to-earnings multiple of about 23, Microsoft's stock is not considered cheap. The MarketBeat consensus rates it as a "Moderate Buy" with 41 buys and six holds, and an average 12-month price target of $561.20. However, bears caution that the elevated multiple could become expensive if rising AI capex continues to pressure margins and free cash flow. For now, Microsoft may appeal most to long-term investors willing to wait for AI spending to translate into stronger Azure and Copilot sales.
