Microsoft is trading at a rare discount after falling about 20% in 2026, as investors question whether heavy AI spending is eroding profitability. Azure demand stays strong, but cloud margins are slipping and capital spending has climbed sharply.
Microsoft is trading at a rare discount after a weak start to the year, and the reason is not weak demand. The stock has fallen about 20% in 2026 as investors worry about the cost of the company's aggressive artificial intelligence spending. Azure keeps growing, with recent growth near 40%.
The problem is profitability. Microsoft Cloud gross margin has been falling as the company spends heavily on AI data centers and computing infrastructure. In the latest quarter, Intelligent Cloud revenue rose 30% while cost of revenue grew 47%. Microsoft also spent $30.9 billion on property and equipment in the third quarter, up from $16.7 billion a year earlier.
The sell-off did not hit Microsoft alone. The company declined by a similar amount to Oracle, which fell 24.8% in the first half of 2026, as both firms carry significant exposure to OpenAI. Microsoft is a major investor in the AI company, owning about 27% as of the end of March.
After the drop, the stock's lower valuation suggests some of these concerns are already priced in. Management put the exposure plainly, disclosing that roughly 45% of its commercial RPO balance ties to OpenAI: "Approximately 45% of our commercial RPO balance is from OpenAI."
Sources: TradingView, The Motley Fool
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