Microsoft Pins Hopes on Nvidia AI Chips as Xbox Margin Collapses and Shares Sink

Microsoft finds itself in a peculiar bind. Its overall revenue surged 18% last quarter to nearly $83 billion, propelled by cloud growth and AI services. Yet two of its consumer-facing divisions — gaming and Windows hardware — are bleeding. A blunt internal memo has confirmed that Xbox is heading for a punitive margin of roughly 3% by the end of the current fiscal year, while the company simultaneously rolls out a high-stakes partnership with Nvidia to revive its PC business.

The Xbox division’s struggles are stark. Over the past five years, Microsoft has pumped more than $20 billion into content, platform development and hardware subsidies for gaming — excluding Activision Blizzard King — yet annual revenue from that unit has fallen by nearly half a billion dollars. The memo, released on June 10, acknowledges that the studio system became overextended, with teams built for multiple strategies — subscriptions, streaming, devices — that now need to be reined in. Xbox still reaches over a billion players a year and logs 72 billion hours of playtime, but scale alone has not translated into profitability.

Adding to the pressure, Reuters reported, citing Bloomberg, that Xbox plans significant layoffs shortly after June 30, the end of Microsoft’s fiscal year. This would be the first major restructuring under Asha Sharma, who took over the gaming division in February. Hardware constraints compound the problem: storage costs for consoles have more than doubled since Sharma’s arrival and could keep climbing through the 2027 holiday season. Microsoft admits it cannot currently produce as many consoles as buyers want.

Should investors sell immediately? Or is it worth buying Microsoft?

On the hardware front, a different kind of reset is under way. Microsoft is betting on a new wave of AI-powered laptops to reverse a 2% decline in Windows license and device revenue. At the Computex trade show, Nvidia CEO Jensen Huang unveiled the "RTX Spark" — an Arm-based AI superchip developed with MediaTek and Microsoft. The chip is designed to run personal AI assistants directly on the laptop. Microsoft will embed it in its new Surface Laptop Ultra, which promises up to 128GB of memory and significant local compute power. Partners including ASUS, Dell and Lenovo will also launch compatible machines this autumn.

Investors, however, remain unimpressed. Microsoft shares closed at €336.95, roughly 16–17% lower than the start of the year and nearly 30% below the 52-week high of €478.10. The stock now trades well under its 200-day moving average of around €389. The market appears to view the AI-laptop push with skepticism, waiting for hard numbers to confirm that the "More Personal Computing" segment can break out of its slump.

The next milestone is June 30. After that, Microsoft’s willingness to fundamentally restructure its gaming business — and the cost for its workforce — will become clearer. Simultaneously, the company’s ability to turn Computex hype into hardware revenue will face its first test when quarterly results arrive. For now, Microsoft is fighting on two fronts with one thing in common: neither is delivering the returns the market demands.

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