Big tech’s AI champ is looking a little battered these days. Microsoft was an early mover on generative artificial intelligence, and investors benefited handsomely. The software company’s stock surged nearly 57% last year in its best annual performance since 1999, according to FactSet data. But the cold splash of reality that AI stocks have received over the past few months has been particularly chilling for the company that helped introduce the world to ChatGPT. Microsoft’s year-to-date performance of less than 11% lags behind all other megacap techs and the S&P 500. It is also the only one in that crew to trail the Dow Jones Industrial Average for the year. There is a mix of reasons. Microsoft’s business is indeed booming. Revenue of $245.1 billion for the fiscal year that ended in June was up nearly 16% from the previous year and a record, while the company’s annual operating margin of 44.6% for the year was its highest since 2001—when the business was about 10% of its current size—according to data from S&P Global Market Intelligence. But keeping its lead in the AI race is proving expensive—even for a company of Microsoft’s vast resources. Big tech companies have boosted spending on AI technology across the board, but Microsoft’s surge still catches the eye. Capital expenditures combined with equipment leases totaled $55.7 billion in the recently ended fiscal year. That is 23% of the company’s reported revenue for the year, up from just 14% of revenue over the previous five years. That outlay likely isn’t an anomaly. Microsoft Chief Financial Officer Amy Hood said during the company’s last earnings call in July that capital spending would increase again this year. Analysts expect total capital spending to represent 28% of Microsoft’s revenue this fiscal year and 27% in the next fiscal year, according to estimates from Visible Alpha.

Full commentary : Microsoft’s blowout capital spending, financial reporting changes and the relationship with OpenAI are making investors think twice.