Microsoft (MSFT) is currently at the intersection of two major adverse trends shaking the technology industry, with its stock potentially recording its worst quarterly performance in two decades since the global financial crisis.
On one hand, the software giant is significantly increasing capital expenditures, while Wall Street is increasingly focused on when investments in artificial intelligence infrastructure will yield more substantial returns in revenue growth. On the other hand, investors are selling off software stocks due to concerns that AI agents developed by startups like Anthropic and OpenAI could replace existing products from companies such as Microsoft.
Jonathan Kofsky, a portfolio manager at Janus Henderson Investors, which holds Microsoft stock, stated: "There is market concern that customers may stop paying Microsoft and instead opt directly for AI service providers. This could impact Microsoft's core business, or at least put pressure on its product pricing and profit margins."
Microsoft's stock has fallen 24% this quarter, potentially marking its largest quarterly decline since the 27% plunge in the fourth quarter of 2008. Year to date, Microsoft has been the worst performer among the seven major U.S. tech giants, significantly underperforming the sector index's 13% decline over the same period.
Kofsky added: "Microsoft's capital intensity has increased substantially. For the stock to perform better going forward, the market needs greater assurance that growth in its software business will not slow noticeably."
The sell-off has driven Microsoft's valuation lower relative to historical levels. Its forward 12-month price-to-earnings ratio has fallen below 20 times, the lowest since June 2016. While Microsoft's P/E ratio remains slightly above that of the S&P 500 index, its stock has recently traded at a discount to this broad market benchmark for the first time since 2015.
Although Wall Street remains optimistic that Microsoft will emerge as a long-term winner in the AI field, the company must keep pace in the spending race for hyperscale computing infrastructure. This dynamic may make it difficult to reverse short-term market sentiment. According to Bloomberg consensus estimates, including lease costs, Microsoft's capital expenditures for the 2026 fiscal year (ending June 30) are projected to reach $146 billion, approximately 66% higher than the $88 billion in fiscal 2025. This figure is expected to increase to $170 billion in fiscal 2027 and further rise to $191 billion in fiscal 2028.
Investors are growing increasingly negative about such large-scale expenditures, particularly when growth has not accelerated noticeably. In the latest quarterly earnings report, the growth rate of Microsoft's closely watched Azure cloud computing business slowed slightly compared to the previous quarter. Meanwhile, user adoption of Microsoft's AI product Copilot has been limited, prompting the company to restructure its AI business division to optimize related services.
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