Microsoft stock price plummeted 25% in Q1, the worst since 2008, as AI "burning money anxiety" crushes the valuation of the trillion-dollar giant.

Author: 🪽, Deep Tide TechFlow

Microsoft’s stock price fell cumulatively by about 25% in the first quarter, the worst single-quarter performance since the 2008 financial crisis, and the largest decline among the “Magnificent Seven.” The eye-watering $146 billion in AI capital expenditures failed to translate into large-scale adoption of Copilot (daily active users are only 6 million—just 1/73 of ChatGPT). The dispute over OpenAI’s exclusivity agreement with Microsoft has further dealt a blow to investor confidence. The forward price-to-earnings multiple has been compressed to about 20x, the lowest since 2016, and at one point even dipped below the valuation level of the S&P 500 index.

Microsoft has just endured its most brutal quarter since the 2008 global financial crisis.

According to a report by CNBC on March 31, Microsoft’s stock price fell cumulatively by about 25% in the first quarter of 2026, dropping from an all-time high of $481 at the start of the year to about $356. The stock closed on March 31 at about $365. The 52-week high was $555.45. This decline not only far exceeds the roughly 7% drop of the Nasdaq over the same period, but also makes it the worst-performing individual stock among the “Magnificent Seven,” while Nvidia fell by only about 4.2% over the same period.

Bloomberg reports that Microsoft is at the intersection of two trends that are unsettling the tech sector: massive capital spending on AI infrastructure is still not showing any corresponding, break-even return on the revenue side, and investors are worried that AI startups such as Anthropic and OpenAI are building agents that could replace Microsoft’s products. Jonathan Cofsky, a fund manager at Janus Henderson Investors, said the market concern is that customers may bypass Microsoft and go directly to AI providers, thereby pressuring the pricing and profit margins of core business offerings.

Copilot adoption is dismal—6 million DAUs versus ChatGPT’s 440 million

The core bottleneck behind Microsoft’s stock plunge is the enormous gap between massive AI investment and product adoption.

According to CNBC, citing Sensor Tower data, as of February 2026, Microsoft Copilot’s app had about 6 million daily active users. In the same period, ChatGPT’s daily active users at OpenAI were 440 million, Google Gemini was 82 million, and even Anthropic’s Claude reached 9 million daily active users in March. Within Microsoft’s own commercial ecosystem, among roughly 450 million Microsoft 365 business subscription users, only about 3% (about 15 million people) purchased Copilot add-on services.

A survey by independent research firm Recon Analytics of more than 150,000 U.S. paid AI users is even more troubling: Copilot’s market share fell from 18.8% in July 2025 to 11.5% in January 2026, shrinking by 39% within half a year. The more critical finding is this: when employees can use Copilot only, adoption is 68%; when a ChatGPT option is added, it drops to 18%; and when Gemini is added as well, the proportion choosing Copilot falls to just 8%.

Microsoft clearly recognizes how serious the issue is. On March 17, CEO Satya Nadella announced a comprehensive reorganization of Copilot’s leadership structure: former Snap executive Jacob Andreou was appointed as Executive Vice President of Copilot, overseeing both consumer- and business-side products. Mustafa Suleyman, who previously led Copilot, was “released” to focus on developing “superintelligent” models. In an internal memo, Nadella defined the adjustment as moving “from a series of excellent products to a truly integrated system.”

But whether organizational changes can restore product competitiveness remains unknown. On May 1, Microsoft also launched a new Microsoft 365 E7 enterprise bundle priced at $99 per user per month, a 65% increase versus the current E5 bundle, and for the first time Copilot is directly bundled into the core enterprise package. This is the company’s first new enterprise pricing tier in a decade.

$146 billion in capital expenditures—capacity expansion can’t keep pace with the investment rhythm

Microsoft’s spending scale on AI infrastructure is making the market uneasy.

According to analyst estimates compiled by Bloomberg, Microsoft’s fiscal year 2026 (ending June) capital expenditures (including leases) are expected to be $146 billion, up 66% from $88 billion in fiscal year 2025. Analysts expect this figure to rise to $170 billion in fiscal year 2027 and further to $191 billion in fiscal year 2028. Most of these investments will be used to expand Azure’s AI computing capacity and support the deployment of Copilot within productivity suites.

However, the most recent quarter’s earnings report showed that Azure growth has slowed for the first time in years. Constraints on data center capacity on the supply side, power supply bottlenecks, and equipment delivery timelines limit Azure’s ability to meet demand—and this situation is still continuing in 2026. Investors are increasingly questioning whether such massive capital spending can translate into sustained revenue growth sufficient to support Microsoft’s premium valuations over the past several years.

On the valuation side, the data has already provided an answer. According to Bloomberg data, Microsoft’s forward P/E has been compressed to about 20x, the lowest level since June 2016, and at one point fell below the valuation multiple of the S&P 500 index—this is the first time since 2015. The magnitude of the stock’s divergence from its 200-day moving average is the largest since 2009. The entire valuation has been reset to levels seen at the end of 2022, before the AI boom was ignited by ChatGPT.

OpenAI cracks deepen—$5 billion in Amazon dealings sparks a legal battle

Another layer of pressure for Microsoft comes from the deterioration of its relationship with OpenAI.

According to the Financial Times in the U.K. on March 18, Microsoft is considering taking legal action against OpenAI and Amazon. The focus of the dispute is a roughly $5 billion cloud computing agreement between Amazon and OpenAI—which designates AWS as the “exclusive third-party cloud distribution provider” for OpenAI’s enterprise platform Frontier. Microsoft believes this violates its Azure exclusivity clauses signed with OpenAI.

OpenAI and Amazon argue that Frontier uses a “stateful runtime environment,” not “stateless API calls” that would be covered by Microsoft’s exclusivity rights, and therefore does not constitute a breach. A person familiar with Microsoft’s position told the Financial Times: “If they breach, we’ll sue. If Amazon and OpenAI want to bet on their lawyers’ creativity, I think the odds are in our favor.”

The dispute has not yet escalated into a formal lawsuit, and both sides are still in negotiations. But Microsoft has begun taking hedging measures—its Copilot Cowork feature launched on March 9 is built on Anthropic’s Claude model at the underlying layer rather than OpenAI’s products. Microsoft is also accelerating the development of its own MAI series foundation models, and expanding the Maia 200 AI acceleration chips and the Fairwater data center network, systematically reducing reliance on a single AI supplier.

Wall Street is split: “Buy” ratings stack up, but consensus is loosening

Despite the brutal drawdown, Wall Street’s ratings for Microsoft remain heavily concentrated in the “buy” range. According to Bloomberg data, among 67 analysts tracking Microsoft, 63 rate it a buy, 3 rate it a hold, and 1 rate it a sell. The average 12-month target price is $592, implying upside of more than 64%—the highest level since Bloomberg began recording in 2009.

But under the consensus, cracks are already visible. UBS lowered its target price for Microsoft from $600 to $510, saying the Copilot narrative “needs improvement” to drive a valuation re-rating. Melius Research analyst Ben Reitzes warned that there is limited upside potential in Azure and said bluntly that Microsoft needs to “fix Copilot.” On the more optimistic side is Bank of America analyst Tal Liani, who recently re-covered Microsoft and issued a buy rating, citing that Microsoft has “durable, multi-year growth” in cloud computing and AI.

Allspring Global Investments fund manager Jake Seltz believes Microsoft shares have “very high long-term value,” that its AI strategy will ultimately be validated, and that today’s panic is creating opportunities.

Microsoft’s next quarterly earnings report is scheduled for release on April 28. Against the backdrop of continued sluggish Copilot adoption, tests facing the OpenAI relationship, and AI capital expenditures still expanding, Nadella only needs to answer one core question: when will a trillion-dollar-scale AI bet finally see returns?