Microsoft CEO Satya Nadella speaks at the Microsoft AI Tour event in Munich, Germany on February 25, 2026.
Sven Hoppe | Picture Alliance | Getty Images
microsoft Wall Street just finished its worst quarter since the 2008 financial crisis, as investors downgraded the outlook for the software giant’s artificial intelligence sector.
The company’s stock price plunged 23% in the first quarter, more than its tech peers and the Nasdaq, which fell 7% during the same period. Microsoft rebounded slightly on Tuesday amid broader market gains, with shares rising 3.3%, the biggest gain since July.
While Microsoft continues to dominate in workplace productivity software and the Windows operating system, the company faces dual pressures to grow effectively in the AI space while also building out its cloud AI infrastructure to meet the surge in demand.
Oil prices are soaring due to the Iran war, and the cost of building and operating data centers may rise. And on the product side, Microsoft’s AI assistant Copilot has yet to see much traction as users flock to competing services. googleOpenAI and Anthropic.
Microsoft vs Nasdaq this year
“Redmond is in trouble,” Melius Research analyst Ben Reitzes wrote in a March 23 memo, referring to Microsoft’s headquarters. Reitzes, who has a hold rating on the company’s stock, said the company will need to use valuable capacity in the Azure cloud to fix Copilot, but has no other choice “because we need Copilot to maintain momentum in its most profitable and largest segment.”
Microsoft declined to comment.
Meanwhile, software stocks are being hammered, with names such as: adobe, atlassian and ServiceNow It has fallen more than 30% this year.
“Much of traditional SaaS is dying/perhaps going into terminal decline,” SaaStr founder Jason Lemkin wrote in a post about X this week, using the acronym for Software as a Service. In a blog post, he pointed out that software’s revenue multiple does not match that of the S&P 500.
Microsoft’s multiple has not been this low since Q4 2022, when OpenAI introduced ChatGPT, according to Capital IQ data.
DA Davidson analyst Gil Luria told CNBC that the decline in the stock price is not justified and recommends buying the stock. In its most recent quarter, Microsoft reported nearly 17% revenue growth, accelerating from the year-ago period.
“The disconnect between Microsoft’s fundamental business results, its stock price performance, and its valuation is the largest in decades,” Luria said. He said he expects the company’s profit growth to outpace the broader market this year.
“Of all the enterprise software, there is no product as tenacious as Microsoft Windows and Office,” he said.
Microsoft is looking to build a larger revenue base from its productivity software with the Microsoft 365 Copilot AI add-on, but so far only 3% of commercial Office customers have a license for it. Luria said he has access to 365 Copilot but is not a fan. More importantly, Microsoft has pricing power over Office subscriptions, he said. The company announced plans to raise prices in December.
Suleiman’s “demotion”
As Copilot struggles to gain traction with users, Microsoft announced two weeks ago that Mustafa Suleiman, the former co-founder of AI lab DeepMind and the developer behind consumer-facing Copilot, would focus on building AI models. Microsoft tasked the former with snap Executive Jacob Andreou leads the Copilot experience for consumer and commercial clients.
“There are concerns that the Microsoft 365 Copilot business is not quite living up to their expectations, and new competitors may emerge in this space,” said Kyle Levins, an analyst at Harding Loevner, who owned $219 million in Microsoft stock at the end of December.
Mr. Levins took the restructuring involving Mr. Suleiman as good news. others were not.
“This sounds like a demotion at best,” former Jane Street trader Agustín Lebron wrote in X. The move followed the departure of several high-profile executives, including gaming chief Phil Spencer and Microsoft’s top productivity leader Rajesh Jha.
Microsoft still has healthy growth with Azure, which is second only to Azure. Amazon Cloud infrastructure web services. The division’s sales rose 39% in the December quarter. Finance chief Amy Hood said in January that growth rates could have been in the 40s if the company had allocated all of its AI chips to Azure, rather than giving some of them to teams that run services like Microsoft 365 Copilot.
Azure benefits from a huge backlog of business from OpenAI and Anthropic. Microsoft’s remaining commercial performance obligations in Azure more than doubled year over year to $625 billion in the December quarter.
This is a reminder that Microsoft was considered a generative AI pioneer among tech hyperscalers due to its 2019 investment in OpenAI and strategic partnerships with startups. However, the two companies no longer have exclusive arrangements when it comes to cloud infrastructure and now compete in many areas.
OpenAI announced a service called Frontier in February, which the company said will “help enterprises build, deploy, and manage AI agents that can do real work.”
Microsoft CEO Satya Nadella has been promoting the company’s AI enhancements on social media, putting on a fearless expression.
“It’s very competitive, but it’s not as zero-sum as some people are making it out to be,” he said in January.
Aaron Foresman, managing director of equity research at Microsoft investor Crawford Investment Counsel, said Nadella’s continued presence is critical to the company, which he led in 2014 when he replaced Steve Ballmer.
“We have tremendous trust and confidence in Satya,” Foresman said.
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