Microsoft lifts 2026 AI spend by $25 billion to cover component price rises
Will write checks for $190 billion and even those megabucks may not satisfy demand
If you've felt the sting of surging hardware prices, Microsoft can sympathize because the company on Wednesday said it expects its 2026 capital expenditure will hit $190 billion, with $25 billion of that due to rising component costs.
Memory and storage prices have skyrocketed since last northern autumn, in some cases more than tripling in price, with demand for AI infrastructure squarely to blame.
Despite higher costs, Redmond appears undeterred in its quest to win the AI arms race. Last quarter, Microsoft spent roughly $32 billion to bring additional compute capacity online, which means the company is on track to spend another $158 billion between now and Christmas.
According to CFO Amy Hood, next quarter alone the company plans to spend about $40 billion on hardware and datacenters to house it.
Hood said that despite spending megabucks “we expect to remain constrained at least through 2026.”
The company's infrastructure build-out has been met with growing concern from Wall Street, and understandably so given that in the last four quarters, Microsoft has spent roughly $97 billion on infrastructure and equipment to win $37 billion of annual recurring revenue (ARR) for its AI services. That's up 123 percent from this time last year, but still short of achieving obvious ROI.
In her prepared statements ahead of Microsoft’s Q3 earnings call, Hood attempted to reassure investors that the company's investments will eventually pay off.
"We remain confident in the return on these investments given higher demand signals and increasing product usage, as well as the efficiencies we're already driving across the platform," she said.
These concerns may have motivated Microsoft's decision earlier this week to pivot GitHub Copilot from an all-you-can-eat scheme to a pay-per-token model. It probably doesn't hurt that Microsoft has been freed from having to share revenues with its long-time partner OpenAI, after they opened their relationship to other models and clouds earlier this week.
While Microsoft's AI business can't quite pay the bills yet, its cloud biz is making bank.
In Q3, Microsoft's profits jumped 23 percent year over year to $31.8 billion on revenues of $82.9 billion. Cloud accounted for more than half of all revenue, at $54.5 billion, an increase of 29 percent compared to this time last year.
Azure may be a cash cow, but Microsoft’s personal computing biz, which spans PCs, gaming, and Bing, saw revenue retreat one percent to $13.2 billion thanks to a two percent year-over-year drop in Windows sales and a five percent dip for Xbox content and services revenues. Improved revenue from Bing search staunched the bleeding.
Looking ahead to the next quarter, Hood forecast Windows OEM revenue to fall in the mid-teens.
Microsoft's broader outlook is a bit rosier. In Q4 the company expects to see revenues rise 13-15 percent year-over-year to $86.7-$87.8 billion. ®