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Microsoft's multi-billion-dollar bet on generative AI isn't paying off as the company expected. Well, at least in the short term. In a not-so-surprising turn of events, shareholders recently sued the software giant, citing that it defrauded them by intentionally overhyping AI (via Reuters).
They further alleged that Microsoft failed to disclose a slump in cloud revenue while continuing to invest billions of dollars in building out AI infrastructure without tangible returns. The complaint was filed in federal court in Seattle by the Michigan-based City of St. Clair Shores Police and Fire Retirement System.
Per the class action lawsuit, Microsoft shareholders alleged that the company fueled investor enthusiasm by portraying a rock-solid partnership with OpenAI, despite its current fragmentation, alongside a strong Copilot rollout. They further contended that the tech giant failed to adequately disclose or downplayed the scale of resources, particularly the substantial financial commitments required to build data centers essential for developing advanced AI models.
However, Microsoft dismissed the shareholders' claims as being without merit. "Microsoft stands by the integrity of its public statements and will vigorously defend itself in court,” it added.
In case you missed it, Microsoft’s stock fell 25% in Q1 FY26, putting the company on track for its steepest quarterly loss since the 27% drop in late 2008. But it isn't budging. Microsoft is doubling down on AI, with plans to invest about $146 billion in infrastructure in 2026, which is approximately twice last year’s $88 billion.
Market analysts and experts warned that Microsoft could be facing its worst quarter since the 2008 financial crisis if it continues blowing money on AI that isn't meeting investor expectations for returns.
For Q2 FY25, Microsoft's earnings report revealed 39% revenue growth in its Azure and cloud business, meeting analyst forecasts but down from 40% in the prior quarter, and projected 37% to 38% growth in the first three months of 2026.
It's also worth noting that the company reported $37.5 billion of capital spending in its second quarter, up approximately 66% from a year earlier and above the $34.3 billion projection by analysts.
Elsewhere, Axel Rietschin, a former engineer on Azure Core Compute who worked at Microsoft for a year, and as a Windows Base Kernel engineer for almost a decade, revealed that the company rushed the product to the market to compete with Google and Amazon. Consequently, it led to a talent exodus and lackluster software. AI hype left Microsoft’s cloud fragile and struggling to compete.
There has been concern, especially among residents, about the construction of data centers in their localities, which seemingly prompted Microsoft's "Community-First" AI infrastructure approach, which addresses some of the issues raised by communities themselves, including reducing its water consumption and promising not to increase electricity bills.
More recently, Microsoft CEO Satya Nadella revealed that the company is developing a new cooling technology dubbed full immersion, which will address the high demand for water by data centers. As such, data centers will now need as little water for cooling as "what a single restaurant would use."
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