Market Sentiment Sours on Microsoft Amid AI Spending Concerns

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Despite posting robust quarterly figures in late January, Microsoft's stock has faced a sustained sell-off, with investor enthusiasm waning. The equity has shed approximately 14% of its value since the earnings release, now trading well below the $400 threshold. Pressure intensified recently following a significant downgrade from investment bank Stifel, which slashed its price target and contributed to the downward momentum.

The immediate catalyst for the latest decline to $394.91 was an analyst adjustment by Stifel's Brad Reback. He downgraded his rating from "Buy" to "Hold" and executed a dramatic cut to his price objective, reducing it from $540 to $392. Reback cited heightened competitive pressures in artificial intelligence, specifically from rivals like Alphabet and Anthropic, as a primary reason for the more pessimistic stance. In a related move, Daiwa Capital Markets also lowered its price target, although it maintained its buy recommendation.

Scrutiny is increasingly focused not on revenue generation but on substantial capital expenditures. In the last quarter, Microsoft allocated $37.5 billion to capital investments, chiefly to expand its AI infrastructure, including data centers and GPU capacity. Given the rapid obsolescence of AI hardware, market participants are growing concerned about the profitability and timeline for a return on these massive investments.

Operational Strength Meets Physical Constraints

Microsoft's operational performance remained solid. Revenue advanced 17% to $81.3 billion, while earnings per share of $4.14 comfortably exceeded forecasts. Its cloud segment, Azure, posted impressive growth of 39%.

However, this strength highlights a dilemma unsettling investors: the company is confronting physical limitations. Management acknowledged that capacity constraints are currently capping Azure's expansion. Microsoft simply cannot meet the enormous demand for its AI services fast enough, as the necessary infrastructure is still under construction. For the upcoming third fiscal quarter, the company guided for Azure growth of 37% to 38%—a solid figure, yet one explicitly limited by these supply bottlenecks.

Record Backlog Signals Unmet Demand

An examination of the order books reveals that the issue lies squarely on the supply side, not demand. The metric for "Commercial Bookings" surged dramatically, growing 230% compared to the previous quarter's already strong 112% growth. The commercial remaining performance obligation reached a staggering $625 billion. These figures underscore that corporate clients remain eager to invest heavily in Microsoft's cloud and AI solutions once the necessary capacity becomes available.

For the current third fiscal quarter, Microsoft has provided revenue guidance in the range of $80.65 billion to $81.75 billion. Separately, shareholders of record as of February 19 will receive a quarterly dividend payment of $0.91 per share on March 12, 2026.