Microsoft AI Strategy Backfires, Shares Down 24% as Copilot Lags and Azure Growth Slows

Microsoft CEO Satya Nadella's full-throttle bet on AI three years ago initially gave the company a market edge, but the strategy is now undermining its core business. Microsoft shares have fallen more than 24% over the past 12 months, as investors grow skeptical of AI investment returns. The flagship AI product Copilot lags behind ChatGPT and Claude. LinkedIn has been criticized for being flooded with AI-generated motivational content. The head of Microsoft's Xbox gaming business recently described the unit as "not healthy," and Xbox is undergoing layoffs and restructuring in an effort to justify the 69 billion USD acquisition of Activision Blizzard. Internally, employees are questioning the company's plan to invest 190 billion USD in AI infrastructure this year. The three core businesses—Microsoft 365, GitHub, and Azure—have already been impacted by AI. Gartner analysts predict AI will threaten the dominance of traditional productivity suites, triggering a 58 billion USD market shake-up.

Microsoft executives say Microsoft 365 continues to grow and Copilot adoption is rising. GitHub faces pressure from competitors such as Cursor and Claude Code. SpaceX plans to acquire Cursor for 60 billion USD. Microsoft has held internal discussions about a major overhaul of GitHub. Computing power shortages are a widespread issue. Despite the shortage, Microsoft has raised sales targets for Azure salespeople this year, with some increases of 30%. CFO Amy Hood said the company prioritizes allocating scarce computing resources to its own AI products before providing them to Azure customers. If GPUs were allocated to Azure instead of its own AI products, Azure growth would exceed 40%, rather than the actual 39%. Microsoft previously reported Azure revenue of 75 billion USD for fiscal 2025, a result that triggered one of the largest post-earnings share declines in the company's history, with shares falling more than 10%.

The resource allocation dilemma has intensified, and Microsoft has begun turning to competitors for help, including Amazon and Google. Internal discussions are underway on how to balance resources. Nadella has passed the pressure down to employees, reshaping the organizational structure and leadership. He promoted Judson Althoff to CEO of Microsoft's commercial business to focus on AI. Microsoft AI head Mustafa Suleyman has narrowed his focus to the "superintelligence" project; Nadella's deputy Rajesh Jha has retired; and product marketing head Yusuf Mehdi is preparing to leave. This year, Microsoft reformed its performance evaluation system, simplifying it into five categories and widening performance differentiation. At the same time, managers have been asked to reduce the number of senior engineering positions.