As Microsoft charts AI spending, Wall Street and workers keep watch

Microsoft has rarely seen a wipeout like it.

At one point this summer, the Redmond-based tech giant saw its stock price plummet 35% from its all-time high.

The company wasn’t on the ropes financially. In fact, Microsoft was more profitable than ever, with a growing cloud computing business that propelled the company to earn $133 billion for the year. 

The swing mirrors the shift in Wall Street’s perception of tech giants’ spending on artificial intelligence.

Before the fall, Microsoft’s share price had been climbing for years, with its market valuation hitting and surpassing $4 trillion at some points in 2025. The rise was thanks in large part to the perception that it was a leader in the artificial intelligence race, through its tight partnership with ChatGPT maker OpenAI.

“There was a belief that AI was going to be a tail wind for everything in software,” said Bernstein Research analyst Mark Moerdler. “Microsoft seemed to have a great position in the market and people became enthusiastic about its opportunities.”

But Microsoft, like other tech giants, has been pouring billions of dollars into the technology beyond its OpenAI partnership, including its own AI assistant, Copilot. And Wall Street reacted with panic.

Panic isn’t the mindset at Microsoft, according to Charles Lamanna, the executive vice president who oversees Copilot and the company’s agentic business, even when the stock plummets after an earnings call.

“We’ve died and been reborn multiple times,” Lamanna said. “There was an immense amount of change with the cloud and a bunch of great companies did not make it to the other side. But Microsoft did.”

Still, Microsoft isn’t shrugging off the market altogether. The company has been in turnaround mode for about a year now, with its leaders, including CEO Satya Nadella, questioning the future of the company’s legacy products. It’s also taken a closer look at its payroll and decided the days of devoting capital to a growing workforce are gone.

Microsoft’s stock price has recovered and fluctuated between roughly $490 and $510 per share over the past month, still down from the all-time high of $542 in October. But there’s also a lingering doubt. Could the market turn again?

The big bet

A palpable frustration could be felt at Microsoft in early 2026. While Wall Street was hammering the company, Microsoft felt a certain ownership of the AI race. 

Microsoft had invested $11 billion into OpenAI, the San Francisco-based startup that introduced generative AI to the world through ChatGPT in 2022. The two companies held a close relationship in the early days of the AI race, and by the next year, Microsoft was pushing more of its resources toward the technology.

By 2024, Microsoft’s capital expenditures were quickly rising. In the fiscal year that ended June 30, 2025, the company spent a record $88 billion to buy computer chips and fuel its data center building spree.

Enthusiasm for Microsoft kept steady.

Cloud computing growth, which the tech industry had been riding for the prior two decades, was topping out, according to Moerdler. Through OpenAI and the company’s generative AI models, Microsoft appeared on the cutting edge of tech’s potential new area of hyper growth and looked set to take off with its own Copilot product line.

In July 2025, the company reported its fiscal year earnings and included Azure revenue for the first time, saying it had grown on the back of its AI ambitions. Wall Street was thrilled, spiking the company’s market valuation to a shade under $4 trillion.

But after that, capital expenditures kept growing and they seemed to be outpacing cloud growth, Moerdler said. In the year ending June 2026, Microsoft spent $117 billion on capital expenditures, an almost $30 billion increase from the year before.

Anxiety stemmed from what Microsoft was spending the money on. While analysts had assumed it was predominantly data centers, Microsoft began reporting that more billions were spent on computer chips and other hardware to power AI models. The useful life for that hardware was much shorter than for data centers, which shrunk the window to recoup that investment. 

The company was essentially pouring money into Copilot, but investors weren’t seeing rapid Copilot revenue growth. Fears of a bubble, industrywide, popped up.

“People are worried you’re investing in something that could be a bubble or that is potentially a low-margin business,” Moerdler said. “Is the revenue going to be profitable and sustainable? All of these have been hanging over Microsoft’s stock.”

The risks

Microsoft’s AI investments, including Copilot, are a bet. 

Copilot’s reputation has fluctuated. Mirroring the volatility of the stock market, the perception of AI assistants is constantly changing as the technology continues to evolve. Once seen as the fresh product, Copilot faced criticism among industry experts last year, with Microsoft dinged for attaching the product to its existing suite of products to boost user numbers.

Since last summer, Lamanna and his organization have been trying to turn around how consumers see Copilot. And it’s working, as Copilot’s adoption rate jumped between May and July.

Part of that effort has been to take the perception of Copilot from a simple chatbot to a machine that’s part of a manufacturing assembly line.

Because of AI’s rapid development toward the end of last year, Lamanna said, software engineering as he knew it “ceased to exist.”

Engineers were not replaced by robots per se; rather their role was, as Lamanna tells it.

“In the past, you had coders who wrote code. Their job was to build the product itself,” Lamanna said. “By January, the role of a software engineer was to build the agentic coding machine, which builds the product.”

As the backlash over “AI slop” has dominated the conversation in the past year, Lamanna said his organization has been able to use the added productivity from automated coding to create more quality products.

As Microsoft finds a strategy for its AI bet, it is well aware of the risks to its legacy brands, like Windows. Integrating products like Copilot into every existing Microsoft interface could be a way to juice AI usage, but there are risks.

Pavan Davuluri, Microsoft’s executive vice president of Windows and devices, has actually been pulling back on full AI integration across the products in his organization.

Microsoft’s attempt to strike a balance with its AI strategy can create seemingly conflicting AI efforts between divisions.

Lamanna is trying to get Copilot in front of more customers, while Davuluri has slowly been taking it away in certain Windows features. 

Davuluri admits that an operating system like Windows has a murky future in the AI age. Microsoft feels that squeeze, as Wall Street carefully eyes the company’s AI-fueled revenue amid rising capital expenditures and the idea that AI will eat away at the software business. Microsoft, through Windows, built its multitrillion-dollar empire on software.

Windows boasts over a billion monthly customers, spread across personal and business computers, making it the perfect platform to get AI products in front of eyeballs. But earlier this year, Microsoft realized there’s backlash with that.

Davuluri introduced changes to Windows 11, the current version of the software, in an ongoing bid to polish it and regain trust with customers. In several company blog posts this year, Davuluri has shared the way the company has been pulling back unwanted AI features and fixing other user-interface issues.

“One of the big initiatives we have this year is an effort making sure we are delivering on the expectations, the value, customers see, and the promise around just great user experiences, craftsmanship in the product,” Davuluri told The Seattle Times.

As for the ongoing changes to Windows, Davuluri said “some of them will have AI and some of them will not.”

‘Control room’ 

While Microsoft tries to show its might in the AI race, worker morale has taken a hit after sweeping cuts that were chalked up to a desire for a more nimble company and the burden of rising capital expenditures. 

Employees were hurt, as the company’s stock price rose and Wall Street analysts heard of soaring profits. Nadella addressed the incongruence in a memo to employees after the layoffs.

“By every objective measure, Microsoft is thriving … And yet, at the same time, we’ve undergone layoffs,” Nadella said in July 2025. “This is the enigma of success in an industry that has no franchise value.”

Chief People Officer Amy Coleman stepped into her role around that tumultuous time. In an interview with The Seattle Times, she said she felt herself tasked with trying to find a way to avoid a culture of constant employee turnover.

Since those layoffs, Coleman said she’s set up a “control room” to focus on redeployment and reskilling. 

“We’re looking at how we cannot rely so much on layoffs being a workforce tool,” Coleman said.

The company says it is not using AI to replace workers, but it is creating new roles that affected employees have the chance to step into. As a result, Microsoft’s total head count of roughly 52,000 employees based at its Redmond headquarters stayed relatively flat over the past year despite layoffs. 

But Microsoft sees itself at a comfortable ceiling for now. To keep a lid on its workforce growth, it has tried other avenues, including a voluntary retirement program earlier this year.

Layoffs still didn’t fully stop. In July the company laid off 4,800 employees companywide; 605 Washington-based employees were affected.

Coleman said the focus is on redeployment, but “it doesn’t mean (layoffs) won’t still happen as we get out of certain businesses or regions.”

Asked if the company has lost trust with employees, Coleman said Microsoft “learned a lot from last summer, and we always have the opportunity to learn and change.”

An uneasy rally

When Microsoft reported its full fiscal year earnings in July, it set off a rally on Wall Street, bringing it closer to the $4 trillion valuation again. 

Since then, the rally has cooled off, and Microsoft’s value has dipped to about $3.6 trillion as the share price trickles down again.

Still, the yearlong canyon on Microsoft’s stock chart underscores the volatility tech companies are experiencing. And unlike during the internet or mobile transitions, trillions of dollars are at stake.

Suresh Kotha, a professor at the University of Washington Foster School of Business, said established tech companies are always going to have trouble keeping up with startups during these times.

“The debate about the return on AI capital is what keeps the stock volatile,” said Kotha, who focuses on corporate entrepreneurship.

Companies like Microsoft are caught in a cycle of skepticism around investments because if they’re spending too little, they might lose ground to competitors. And if they spend too much, the path to recoup those investments gets murkier.

Microsoft has had uneven transitions before. The company missed on the smartphone era, a calamity that ended with the massive acquisition of Nokia in 2014. The endeavor flamed out two years later, as Microsoft wrote off the business and sold what it could. 

Kotha said Microsoft has the cloud computing infrastructure and the established success in enterprise software to capture AI value. And the company showed that recently, with Azure cloud computing revenue growth last year that exceeded Wall Street’s expectations.

“The past is not a good predictor for their success, but they’re making all the right moves,” Kotha said. “It could go the mobile route for Microsoft or cloud computing route, and if it goes mobile, Microsoft is in big trouble.”

The Seattle Times is among the news organizations that have sued Microsoft and OpenAI, alleging copyright infringement. The two companies have denied any wrongdoing.

Microsoft Philanthropies underwrites some Seattle Times journalism projects.