Microsoft shares slip as AI spending pressures investors

Microsoft shares slipped about 1% after the company said it would cut roughly 4,800 jobs, equal to about 2.1% of its global workforce, and restructure its Xbox business while continuing to ramp up spending on artificial intelligence infrastructure.

The reductions include about 3,200 roles tied to the gaming overhaul, with Microsoft saying it may divest as many as five Xbox studios and reallocate resources to AI projects. The company has framed the cuts as a way to streamline operations and fund priority investments in AI and cloud services.

Investors treated the announcement differently than some earlier large tech layoffs that were taken as signs of tighter cost control. Market reaction suggested concern that heavy AI capital expenditures could weigh on near-term profitability. Microsoft’s shares are down about 18% year to date, making the stock a laggard among the largest U.S. technology firms.

Wolfe Research reduced its price target on Microsoft to $525 from $570 while maintaining an Outperform rating, citing sharply higher memory prices. The firm raised its estimate for Microsoft’s fiscal 2027 capital expenditure to $270 billion from $230 billion and projected fiscal 2027 free cash flow of negative $17.4 billion versus an earlier estimate of positive $14.7 billion. Wolfe also trimmed its fiscal 2027 gross margin forecast to 63.1% from 64% and lowered its earnings-per-share estimate to $19.02.

Wolfe’s analyst highlighted Microsoft’s disclosure of $11.5 billion in restricted investments tied to supplier agreements, suggesting the company could be locking in component costs to limit future pricing pressure. Despite the revisions, Wolfe remained positive on Microsoft’s long-term AI strategy and projected Azure revenue growth of 41% in fiscal 2027 and 40% in fiscal 2028.

Market observers described the layoffs as a targeted reallocation of resources rather than a new growth catalyst. Parth Talsania, chief executive of Equisights Research, characterized the cuts as portfolio reallocation and operating discipline and said investors are more likely to reward evidence that AI monetization is scaling faster than AI-related costs.

Danni Hewson, investment director at AJ Bell, said the market is still waiting for clear financial proof that Microsoft’s large AI spending is translating into stronger results. Reports that the company had been preparing another round of layoffs may have already lowered expectations ahead of the announcement.

Gil Luria, head of technology research at DA Davidson, described Microsoft’s capital allocation as a choice to invest where the company sees the biggest opportunities, noting AI can drive infrastructure software sales and increased Office revenue through Copilot while gaming shows slower growth.

Microsoft is scheduled to report fiscal fourth-quarter results on July 29. Street forecasts compiled by Fiscal.ai expect revenue to rise about 15% year over year to $87.66 billion and earnings per share to increase to $4.24 from $3.65 a year earlier. Investors will watch the report for signs that Azure growth is accelerating and that AI spending is beginning to produce the financial returns the market demands.