Last year, I predicted that Microsoft (MSFT 0.48%) would hit an all-time high even after a brutal tariff-induced sell-off in April 2025. Microsoft reached an all-time high of $555.45 per share in late October. But Microsoft is now hovering around an eight-month low, with the stock falling 10.5% after reporting its second-quarter fiscal 2026 earnings on Jan. 28.
Here's why Microsoft has been under pressure even as the S&P 500 continues to make new all-time highs, and whether the stock can recover in 2026.
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AI spending is overshadowing Microsoft's record results
Microsoft's cloud business is booming -- raking in over $50 billion in revenue in its latest quarter. In total, Microsoft's revenue soared 17%, operating income was up 21%, and adjusted diluted earnings per share (EPS) jumped 24%. It was a blowout quarter for Microsoft, but investors may be concerned about the path to profitability of Microsoft's artificial intelligence (AI) investments.
Microsoft spent a mind-numbing $37.5 billion on capital expenditures (capex) in the quarter -- two-thirds of which was on short-lived assets like graphics processing units (GPUs) and central processing units (CPUs). For context, Microsoft's fiscal 2025 capex was $64.6 billion, fiscal 2024 was $44.5 billion, and fiscal 2023 was $28.1 billion. That means Microsoft's present-day quarterly capex is higher than its annual capex from less than four years ago.
Part of the reason for the spending increase is that Microsoft is rapidly investing in AI infrastructure and its own custom AI chip -- called Maia 200. "At the silicon layer, we have Nvidia and AMD and our own Maia chips delivering the best all-up fleet performance, cost, and supply across multiple generations of hardware," said Microsoft CEO Satya Nadella on the company's January earnings call.
Microsoft added 1 gigawatt of data center capacity in its latest quarter and plans to scale Maia for AI workloads -- which will be costly. But Microsoft is justifying its AI spending by stating that demand continues to outpace supply. Still, Microsoft's spending ramp-up is weighing on its margins and making the company far from the capital-light business it used to be.
The software slowdown
Microsoft's AI growth heavily depends on OpenAI making good on its order backlog. Forty-five percent of Microsoft's $625 billion in remaining performance obligations is tied to OpenAI. It wasn't long ago that winning orders from OpenAI was seen as a good thing. But now, some investors are questioning if OpenAI can raise enough money to fulfill its insatiable appetite for AI infrastructure on its path to build 10 GW of data centers.
As an example, Oracle is down 47% from its all-time high in a matter of months, partly due to its dependence on OpenAI to fulfill its cloud bookings. For Microsoft's AI spending to pay off, OpenAI will need to raise money or dramatically grow its revenue so it can make good on its contract backlog.
To top it all off, Microsoft is the world's largest software company. And software stocks have been getting hammered even as the broader tech sector hits new all-time highs, amid fears that AI will continue to disrupt enterprise software.
Microsoft recognizes that software is under threat. But it isn't sitting idly by. Nadella said the following on the January earnings call:
Like in every platform shift, all software is being rewritten. A new app platform is being born. You can think of agents as the new apps. And to build, deploy, and manage agents, customers will need a model catalog, tuning services, harness for orchestration, services for context engineering, AI safety, management observability, and security. It starts with having broad model choice.
Microsoft said that it has the broadest selection of models of any hyperscaler, supporting the latest versions of OpenAI's ChatGPT and Anthropic's Claude, with customers often using both models for Microsoft's enterprise-scale AI building platform, Foundry.
Microsoft is a compelling value
The sell-off in Microsoft is an impeccable buying opportunity for long-term investors. Microsoft's spending is worth monitoring, as it could weigh on profit margins. But the bulk of that spending is going toward AI infrastructure, which Microsoft can always cut back if demand slows.
At a reasonable 29.1 times forward earnings, Microsoft stands out as a top buy for long-term investors, but expect the stock to remain pressured until Microsoft begins converting its commercial backlog into realized revenue.
