Microsoft (MSFT) keeps upping the ante on AI, but investors are keeping a close eye on its key business partner, OpenAI, for signs of what’s next.
Microsoft shares sold off hard following the company’s fiscal second-quarter earnings report after the company announced stunning growth in AI investments. Microsoft’s AI spending for this year could easily surpass $100 billion.
In fact, the stock’s decline puts it more than 20% below its all-time high of $555, which was hit in mid-2025. It has been a fast, steep fall for Microsoft.
This plummet is surprising for the software giant. Looking at the second-quarter earnings report, you’d see one of the world’s most valuable companies growing briskly.
Sales rose 17% to $81.3 billion. Meanwhile, adjusted earnings climbed 23% to $30.9 billion. Both figures beat analysts’ estimates.
Microsoft Cloud was one of the hottest business units, with sales up 26%, while Azure and other cloud-services revenue soared 39%.
At a high level, the numbers look great. But investors are digging down into how Microsoft is investing its cash and they have concerns, particularly about its capital expenditures, or “capex.”
Capital expenditures in the quarter skyrocketed 66% year over year to $37.5 billion . Tens of billions of dollars more are on the way in coming quarters, too. And some investors may think the investment case for AI, at least via shares of Microsoft, is not the slam dunk it once was.
Microsoft Is Pouring Tens of Billions of Dollars Into Short-Lived AI Assets
Few question how much Microsoft is relying on AI for growth, in particular its relationship with OpenAI, of which it owns 27%. Microsoft is expecting to generate literally hundreds of billions of dollars in revenue from OpenAI.
In its earnings release, Microsoft touted its “remaining performance obligation,” a figure that swelled 110% to $625 billion in the latest quarter.
Think of this figure as services that Microsoft has yet to provide to AI players such as OpenAI and Anthropic. About 25% of that total is set to be recognized as revenue in the next 12 months.
Commitments from OpenAI make up 45% of the total, says Microsoft. So, it’s rushing to set up its data centers – stacked with Nvidia (NVDA) chips – to allow it to recognize this future revenue.
You can see that push in Microsoft’s $37.5 billion in capex. About two-thirds of this capital went to short-lived investments such as graphics processing units (“GPUs”) and central processing units (“CPUs”). The remainder went to long-lived assets such as buildings that can be useful for 15 years and beyond.
But a key portion of the concern here is those short-lived assets. Because of the intense nature of the workload in an AI data center, GPUs may last just two and a half to three years on average.
So, a huge portion of Microsoft’s capex is effectively used up in just a few years. To maintain functional AI data centers, Microsoft and other hyperscalers have to keep shoveling money in to keep those GPUs and other processing equipment in good order.
But Microsoft has another complication…
OpenAI is hemorrhaging cash as it grows, billions and billions of dollars annually. So, it needs regular cash infusions to keep it afloat, and it taps customers and other investors for the money.
There’s even some speculation that OpenAI may be exploring an IPO in 2026 as a means to raise this desperately needed cash.
Here’s the complication for Microsoft: The quality of its investments in AI infrastructure rely on OpenAI being able to keep an open spigot of cash. If OpenAI can’t raise cash to pay Microsoft, the latter’s revenue stream dries up… and with it the value of its equity stake in the AI leader.
But there’s some evidence that OpenAI’s competitive position is weakening, with the leader actually losing market share in the AI wars.
Is OpenAI Hurting Microsoft Stock?
While Microsoft shares kept swinging lower in the past few months, other key names in the Magnificent Seven stocks – Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), and Nvidia – have fared better.
For example, Alphabet sits right near its 52-week high, after trending higher for much of 2025. While those other names haven’t done quite so well, they haven’t taken the utter drubbing that Microsoft has.
These companies are pouring money generously into AI, each committing to put in tens of billions of dollars each in the near term. Hyperscalers such as Microsoft are at the high end of that range.
So why does it feel like the market is singling out Microsoft?
Microsoft is one of the big names behind and aligned with OpenAI. OpenAI is the company behind ChatGPT and DALL-E, the text-to-image model. Its AI bots compete with Anthropic, which is also carefully considering an IPO this year, and Google’s Gemini.
But OpenAI is losing market share, and traffic to ChatGPT is falling… to Gemini.
Data from Similarweb indicates that daily traffic to ChatGPT dropped 22% in the six weeks ending in the first week of January. Weekly average visitors plummeted from 203 million to 158 million in that period.
That’s reflected in ChatGPT’s falling share of traffic to chatbot sites. Its share dropped from around 86% a year ago to just 65% today.
Gemini is eating its lunch. Its share soared between 21% and 22% over the comparable period, a more than fourfold gain.
Such startling traffic declines led OpenAI CEO Sam Altman to declare a “code red” in December. After Altman made big promises for the chatbot – the latest version, GPT-5.2, was released later that month – the reality has been much less impressive.
But there’s more going on than just a lackluster iteration of the AI chatbot.
Gemini has been gaining ground in part due to Google’s already existing stranglehold on traditional search and other key distribution channels. Alphabet has built AI tools into its existing Google products such as Gmail, Android, and even the traditional Search engine.
So, rather than needing to go to a specific website for your AI-powered query, users can simply employ the tools they already have, like how AI results already show up in Google Search.
This kind of positional advantage can allow a search market leader such as Google to retain its edge in the pivot to AI-directed queries. Its market share has been surging.
And that’s before you get to any potential relative advantages in the latest Gemini model.
That’s a problem for Microsoft, as well as other players in what’s called the “OpenAI trade” – companies that include Oracle (ORCL), CoreWeave (CRWV), and SoftBank (SFTBY). These businesses are aligned with OpenAI and have suffered relatively larger declines than other AI plays in the past few months.
So, investors in Microsoft will want to carefully watch OpenAI’s search share if they want to understand a key driver of Microsoft’s stock.
Of course, investors have more than just the brand-name AI plays.
It may be time to look past Nvidia and the Magnificent Seven.
Regards,
James Royal
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