Just three years ago, Satya Nadella was seen as the man who had put Microsoft at the forefront of the artificial intelligence race. Now his legacy is at stake. The stock has fallen to 2023 levels, people inside the company are openly questioning the point of its enormous spending, and the technology Nadella made the company’s main focus is threatening the very businesses on which Microsoft was built.
In February 2023, Nadella unveiled an AI-powered Bing search engine before a packed audience near Seattle and declared war on Google in search. The race starts today, he said at the time. A wave of admiration followed. When he helped manage the crisis on OpenAI’s board at the end of that year, investor Bill Gurley called it a remarkable turnaround in the company’s reputation, and CNN Business named Nadella CEO of the year.
Today, the situation looks very different. Microsoft’s stock is down more than 23 percent from a year ago, significantly more than the rest of the Magnificent Seven U.S. technology companies.
Worst quarter since the financial crisis
The first three months of the year were Microsoft’s toughest in nearly two decades. The stock fell 23 percent, a worse result than any of its technology rivals and the Nasdaq index, which lost seven percent. Investors repriced the company at its lowest earnings multiple since the end of 2022. The war with Iran is also pushing up oil prices, making data centers more expensive to build and operate, while Copilot has so far failed to convince users, who are turning to rivals from OpenAI and Anthropic.
According to analysts, Microsoft is in a tight spot. Microsoft has to use expensive Azure cloud capacity to fix Copilot, but it has no other choice because it needs Copilot to maintain momentum in its most profitable segment.
June brought another shock. Microsoft lost more than half a trillion dollars in market value in a single month, and its stock fell by nearly a fifth, its worst month since December 2000. Spending is the main reason. Investment in artificial intelligence and data centers is expected to reach $190 billion this year, 63 percent more than last year.
Word and Excel are no longer the default for the first time
For decades, analysts and managers started their day in Microsoft. They opened Word when they wrote, Excel when they calculated, and PowerPoint when they put together a presentation. Now millions of people do these things directly in AI tools. Gartner analysts predicted this year that artificial intelligence will displace traditional office suites such as Microsoft 365 and Google Workspace, transforming a market worth nearly $60 billion. Meanwhile, Copilot is lagging behind tools such as ChatGPT and Claude.
Microsoft executives counter with growth figures. One of them said that Microsoft 365 is gaining customers and Copilot usage within it is rising, which is why the company is seeking more computing capacity. Analysts outside the company are more skeptical. They point out that Copilot in Microsoft 365 has failed to meet expectations and that this is precisely where new competitors could enter the market.
GitHub squeezed by Cursor and Claude Code
Microsoft acquired GitHub in 2018, remains dominant among programmers, and had a head start in AI-assisted coding with GitHub Copilot. The platform is still growing, and one executive told employees that it had its best month ever, although he did not specify by what metric.
In the meantime, however, new companies have flooded onto the scene. Millions of engineers have adopted Cursor, which SpaceX acquired for $60 billion, and Anthropic’s Claude Code. Microsoft’s leadership discussed the need to rebuild GitHub so that it could compete with these tools. The surge in artificial intelligence is also overwhelming the service, with GitHub suffering several dozen major outages this year. After one such series, Amazon bailed the company out. Microsoft also considered renting infrastructure from Oracle but ultimately backed away over security and compliance concerns.
Azure works, but there is nowhere to build it
The cloud is keeping Microsoft’s momentum going. Azure and other cloud services increased revenue by 39 percent in the latest quarter, and the division reported $75 billion for fiscal year 2025. But executives describe it as a constant juggling act because demand for computing infrastructure has outpaced the company’s ability to build new capacity, and even this year’s $190 billion is not enough.
The crucial issue is who gets access to capacity first. Microsoft first covers the use of its own applications, including Copilot in Microsoft 365 and on GitHub, then invests in product development, and whatever remains goes toward capacity for Azure customers. If the company had allocated the graphics chips from the first half of the fiscal year to Azure instead of its own products, analysts say growth would have exceeded 40 percent rather than reaching 39 percent. After those results were released, the stock fell more than ten percent.
Uncomfortable discussions have begun within the company’s leadership. One executive summed it up by asking why Nadella should prefer helping Adobe grow over Microsoft 365, and admitted that he had no idea how to sell this message to customers. Microsoft is therefore seeking available servers wherever it can find them and is also evaluating offers from Amazon and Google.
Tensions are boiling over inside the company
Nadella promoted Judson Althoff to head of the commercial business so he could free himself up to work directly on artificial intelligence with engineering leaders. A leadership overhaul followed. Microsoft effectively abolished its traditional senior leadership structure and replaced it with smaller, flatter groups. Mustafa Suleyman narrowed his work to superintelligence, Nadella’s longtime colleague Rajesh Jha retired, and product veteran Yusuf Mehdi is preparing to leave the company. Former gaming division chief Phil Spencer has also departed.
The changes have also reached rank-and-file employees. This year, Microsoft overhauled its performance reviews, simplifying them into five categories and making the distinctions between employees much sharper. Managers describe it as a return to the employee-ranking practices of the Steve Ballmer era, while they have also been instructed to reduce the number of people in senior engineering positions. One former manager said the old Microsoft era had returned, when management led through fear and wielded a club. The head of Xbox also recently said that the business is not healthy; the division is laying off employees and restructuring while trying to justify the $69 billion acquisition of Activision Blizzard after the fact.
What do investors think?
Not everyone on Wall Street is pessimistic. Microsoft expects revenue to grow by 17 percent this year, and in the second quarter of 2026 it returned just under $13 billion to shareholders through dividends and share buybacks, a third more than a year earlier. Analysts therefore argue that the current decline is driven more by fear and skepticism than by actual results, and they invoke Buffett’s rule that a good investor is greedy when others are fearful.
The final day of March showed how quickly sentiment can shift. Microsoft gained 3.3 percent along with the broader market that day, its largest one-day jump since July. It received its next report card on Wednesday, when it released results for its fourth fiscal quarter, with investors focusing primarily on the three areas now hanging in the balance: Microsoft 365, GitHub, and Azure.
Sources: fool.com, cnbc.com and aol.com
