Microsoft's AI Engine Stutters: $190 Billion Capex, a Broken Oracle Deal, and a 22% Cash Flow Hit

Microsoft's AI business hits $37B annual revenue, but free cash flow plunges 22% due to $190B infrastructure outlay. Capacity crunch forces AWS emergency hire, while cost pressures push testing of cheaper DeepSeek models.

The arithmetic around Microsoft’s artificial intelligence bet is becoming brutally clear. Revenue from the technology is surging — the AI business alone now runs at an annualised rate of $37 billion, while total quarterly sales climbed 18% to nearly $83 billion and net profit hit roughly $32 billion. Yet the financial engine that funds it all is flashing red: free cash flow tumbled 22% in the last quarter, a direct consequence of the company’s insatiable appetite for data-centre spending. The board has kept the quarterly dividend at $0.91 per share, but that payout, due on 10 September, does little to mask the tension between top-line momentum and bottom-line strain.

That strain comes from an infrastructure build-out of unprecedented scale. Microsoft has budgeted $190 billion for the 2026 fiscal year alone, part of a wider hyperscaler splurge that is expected to push industry-wide capital expenditure past $700 billion this year. The bill is already rewriting the investment narrative. A planned $3 billion cloud deal with Oracle fell through after Oracle failed to secure a critical security certification for US government data; Microsoft has redirected those funds into its own data centres, which also underpin a multi-billion-dollar Pentagon contract. But even that internal expansion has not been enough to keep pace with demand.

The capacity crunch became painfully visible in April 2026, when outages at GitHub, the developer platform Microsoft owns, forced the company into an emergency hire of cloud resources from arch-rival Amazon Web Services. Those workloads are expected to remain on AWS until 2027 before being repatriated to Azure. The scramble underscores how quickly the AI land grab is outpacing even the best-laid infrastructure plans — and how deep the pockets of Microsoft’s customers have become. In China, ByteDance alone funnels over $1 billion annually into the company’s coffers, and Azure’s AI revenues in the country tripled in fiscal 2025. To sidestep US export controls, Microsoft hosts models for clients such as Tencent and Meituan in Singapore.

As if the operational headaches were not enough, security experts at the firm recently flagged a new Trojan that has been active since February, spreading worm-like across Windows systems and communicating via the Tor network. The malware monitors the clipboard during crypto transactions and silently swaps wallet addresses, diverting funds to attackers. Its encryption makes it especially resilient to conventional defences — a reminder that the same infrastructure powering AI also presents a broader attack surface.

On the cost side, Microsoft is looking for leverage. Developers are testing China’s DeepSeek V4 model as a cheaper alternative for the Copilot service, since Anthropic’s models cost around $50 per million tokens while DeepSeek charges just $0.87. At the same time, the company is trying to lock in corporate clients by offering a 15% discount on Microsoft 365 Copilot for three-year commitments of at least 300 licences — a bid to convert AI spending into recurring revenue faster.

Investors, however, remain sceptical. The stock trades at around €330.55 on the Frankfurt exchange and $380 on the Nasdaq, a long way from the 52-week high of $555. Since the start of the year it has shed more than 18% of its value, and the distance from its all-time peak is nearly 31%. The relative strength index sits at 36.8, nudging the shares into deep oversold territory. Added pressure comes from the European Union’s ongoing review of cloud market concentration and the threat of further studio closures at ZeniMax and Bethesda in the gaming division.

CEO Satya Nadella is trying to shift the conversation toward the next phase — autonomous AI agents — and has set a new partner agreement to take effect on 1 December. The September dividend payment may offer a short-term floor for the stock, but the central question remains: can Microsoft sustain an AI revolution without letting the financial foundations crack under the weight of its own ambition?