Microsoft’s Own AI Models Cut Costs by 84% as Earnings Loom Over a Stock Down 30% From Its Peak

Microsoft is heading into its fourth-quarter earnings release on July 29 with a strategy shift that could reshape its AI economics, even as the market punishes the stock for the enormous price tag attached to that transformation. The company has quietly replaced OpenAI’s image-generation models in products like PowerPoint and Bing with its own MAI-Image-2 technology, a move that AI chief Mustafa Suleyman justified in blunt terms: the in-house alternative is faster, cheaper, better quality, and locks in customer loyalty. The numbers back him up — in PowerPoint alone, Microsoft’s model cuts costs by 84% compared to GPT-Image-2, while in OneDrive, storage rates have climbed 26% and load times have dropped by roughly a quarter.

The decision to reduce dependence on OpenAI follows a renegotiation of the partnership terms and signals a broader push to build proprietary capabilities in language, voice, and image generation. It also comes at a moment when investors are scrutinizing every dollar spent on AI infrastructure. BNP Paribas projects Microsoft’s capital expenditures could hit $262 billion for fiscal 2027, up from $104.3 billion in the first three quarters of the current fiscal year. That spending trajectory has weighed heavily on the stock: the forward price-to-earnings ratio has fallen to 20.61, its lowest level in a decade.

The market’s mood was evident on Thursday, when Microsoft shares slid 2.03% to €335.40 in European trading. The decline extends a punishing run that has left the stock down 18.82% since the start of the year and roughly 30% below the record high of €478.10 reached on October 28, 2025. At €335.30 in the secondary market, the shares are just 9% above the 52-week low of €307.10 touched in late June.

Analysts remain broadly bullish despite the selloff. The consensus on Wall Street calls for earnings per share of $4.24 in the fiscal fourth quarter, a 16% year-over-year increase, on revenue of $87.62 billion — growth of 15%. That would follow a third quarter in which Microsoft beat expectations with EPS of $4.27 against a forecast of $4.07, on revenue of $82.9 billion that grew 18%. Azure expanded at roughly 40% in that period, while the annualized AI business hit $37 billion, up 123%. The commercial backlog stood at $627 billion.

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

Oppenheimer analyst Brian Schwartz, who has a $515 price target, expects Q4 revenue of roughly $87 billion and GAAP EPS of $4.16. He points to channel checks showing stable enterprise IT spending, solid demand for AI services, and continued momentum in Microsoft 365 — but warns that rising capital expenditure will be a focus as the market looks toward fiscal 2027. Truist’s Terry Tillman maintains a buy rating with a $575 target, while Bernstein is the most optimistic on the Street at $646. Of the 37 analysts covering Microsoft, 35 rate it a buy, one a hold, and one a sell, with an average price target of $558.86.

Alongside the cost-savings from its own image models, Microsoft has deepened another long-standing relationship. The company extended its decade-old partnership with Databricks into the 2030s, with Databricks planning to lean more heavily on Azure Databricks and Microsoft’s Arm-based Azure Cobalt infrastructure. Microsoft, in turn, will embed the Databricks platform more deeply into products including the Genie AI assistant. Judson Althoff, CEO of Microsoft’s commercial business, framed the logic in terms of the next AI frontier: the winners will be those that help customers turn their own knowledge into genuine intelligence by connecting data, AI, and business context.

The strategic moves come against a backdrop of operational headwinds. Microsoft cut 4,800 jobs this year, 3,200 of them in the Xbox division, and Xbox chief Asha Sharma was subsequently appointed to a Federal Reserve working group examining AI’s impact on employment and productivity. A critical security vulnerability in SharePoint — designated CVE-2026-50522 and enabling full remote code execution — was patched in July after active exploitation. The U.S. cybersecurity agency CISA added it and another SharePoint flaw with a severity score of 9.8 to its catalog of exploited vulnerabilities. Separately, a survey by IT services firm CoreView found that two-thirds of companies have delayed or halted Microsoft Copilot adoption over concerns about data leaks through SharePoint.

Investors also face a pending class-action lawsuit accusing Microsoft of making misleading statements about its AI business. The deadline for investors to step forward as lead plaintiffs expires in early August 2026.

Microsoft at a turning point? This analysis reveals what investors need to know now.

In Europe, Microsoft is expanding its AI footprint through a partnership with French firm Mistral, building shared AI infrastructure on Nvidia’s Vera Rubin chips. The collaboration aims to strengthen cloud and AI operations outside the U.S., even as the market waits to see whether the massive server investments will translate into revenue growth.

For the July 29 earnings report, the picture remains mixed. Analysts expect robust expansion at Azure and in the AI business, but the combination of rising capital spending, security setbacks, and workforce reductions has kept sentiment subdued. The test for Microsoft will be whether its push toward cheaper, proprietary AI models and deeper platform partnerships can begin to show up in the numbers — and whether that will be enough to reverse a stock that has shed nearly a third of its value since October.

Ad

Microsoft Stock: New Analysis - 24 July

Fresh Microsoft information released. What's the impact for investors? Our latest independent report examines recent figures and market trends.

Read our updated Microsoft analysis...

en | US5949181045 | MICROSOFT’S | boerse | 69858397 |