Microsoft closes its worst quarter since 2008 amid AI spending fears

Wednesday 01 - 08:20

By: Dakir Madiha

Microsoft closes its worst quarter since 2008 amid AI spending fears

Microsoft ended the first quarter of 2026 with its stock down roughly 25%, marking its steepest quarterly decline since the fourth quarter of 2008, when shares fell 27% during the global financial crisis. Although the stock rebounded on Tuesday, the final trading day of the quarter, the recovery did little to offset months of selling driven by mounting concern over the company's massive bets on artificial intelligence infrastructure.

The software giant became the worst-performing stock among the so-called Magnificent Seven this year, with shares sliding from a peak of nearly $481 in January to around $370 by quarter's end. The selloff pushed Microsoft's forward price-to-earnings ratio below 23, its lowest level in roughly eight years, and briefly pulled its market valuation below that of the S&P 500 for the first time since 2015.

At the center of investor anxiety is the sheer scale of Microsoft's capital commitments. Capital expenditures reached $37.5 billion in the fiscal second quarter ended December 2025, a 66% year-on-year increase, with roughly half directed toward GPUs, CPUs, and data center infrastructure. According to Bloomberg estimates, projected capital spending for the full fiscal year 2026 stands at around $146 billion, nearly double the prior year's figure.

Chief Financial Officer Amy Hood acknowledged that demand continues to outpace supply, with the company remaining capacity-constrained due to global power grid shortages. Analysts estimate that at Microsoft's current rate of AI-related revenue generation, it could take six to eight years to recoup its infrastructure investments.

Microsoft's remaining commercial performance obligations, a measure of contracted future revenue, surged 110% year-on-year to $625 billion in the fiscal second quarter, a figure the company has cited as evidence of strong demand. But approximately 45% of that backlog is tied to a single client, OpenAI, raising concentration-risk concerns among analysts.

Meanwhile, revenue growth in the Azure cloud unit decelerated from 40% in the fiscal first quarter to 39% in the second, falling short of expectations from investors who had anticipated growth above the 40% threshold. The combination of slowing cloud growth, sharply rising capital costs, and fears that AI startups could eventually displace established software products created what Bloomberg described as two troubling trends converging on a single stock.

Despite the quarter's steep losses, Wall Street analysts remain broadly bullish. Sixty-three of the 67 analysts tracked by Bloomberg carry buy recommendations on the stock, with a 12-month average price target of around $592, implying upside potential of more than 60%.