Microsoft stock drops 12% as AI spending reaches record USD 37.5 Billion

Microsoft shares fell as much as 12.18% on Thursday, January 29, 2026, marking the company's worst single-day performance since the beginning of the pandemic in March 2020. This sharp decline erased approximately USD 357 billion in market capitalization. The sell-off followed the release of fiscal second-quarter results on Wednesday evening, where strong headline numbers failed to satisfy investor concerns regarding the high costs of artificial intelligence.

Financial highlights and the "Double Beat"

On paper, Microsoft’s second quarter of fiscal year 2026 surpassed market expectations. The company reported:

• Revenue: USD 81.3 billion, a 17% increase year-over-year.

• Adjusted EPS (Non-GAAP): USD 4.14, beating the consensus estimate of USD 3.92.

• Net Income (GAAP): USD 38.5 billion (boosted by a USD 7.6 billion gain from OpenAI investments).

• Cloud Revenue: For the first time, quarterly cloud revenue crossed the USD 50 billion mark, reaching USD 51.5 billion.

Despite these figures, the market reaction was negative. Investors focused on the underlying costs and the specific growth rates of the cloud division.

The AI Expenditure Surge

The primary driver of investor skepticism was the surge in capital expenditure. Microsoft spent USD 37.5 billion in the quarter on property and equipment, a 66% increase from USD 22.6 billion in the same period last year. Most of this spending supports the construction of data centers and the acquisition of AI chips to meet rising demand.

While CEO Satya Nadella stated that the company is still in the "beginning phases of AI diffusion," the scale of investment has pressured near-term margins. Free cash flow for the quarter was reported at USD 5.9 billion, a decrease attributed directly to these massive infrastructure outlays.

Azure and Cloud Performance

Azure, Microsoft's flagship cloud platform, grew by 39% (38% in constant currency). While this exceeded official company guidance, it fell short of the "whisper numbers" set by analysts at 40% or 41%.

The company disclosed that it continues to face capacity constraints. Demand for AI services currently exceeds the available infrastructure, limiting Microsoft's ability to convert customer interest into immediate revenue. Furthermore, a significant disclosure revealed that 45% of Microsoft’s USD 625 billion revenue backlog(RPO) is linked toOpenAI commitments, raising concerns about revenue concentration and the company’s reliance on its primary partner.

Segment Performance and Market Context

The "More Personal Computing" segment, which includes Windows and Xbox, reported revenue of USD 14.3 billion, down 3%. Xbox content and services revenue also declined by 5%, adding a layer of weakness to the report.

The decline in Microsoft’s stock had a broader impact on the market. As the heaviest-weighted stock in the S&P 500, its fall contributed significantly to the index's 1% decline on Thursday. Other major software firms, including Salesforce and Adobe, also saw their share prices drop as investors questioned the timeline for AI profitability across the sector.