Microsoft lifts 2026 AI spend by $25 billion to cover component price rises

If you've felt the sting of surging hardware pricesMicrosoft can sympathize because the company on Wednesday said it expects its 2026 capital expenditure will hit $190 billionwith $25 billion of that due to rising component costs.

Memory and storage prices have skyrocketed since last northern autumnin some cases more than tripling in pricewith demand for AI infrastructure squarely to blame.

Despite higher costsRedmond appears undeterred in its quest to win the AI arms race. Last quarterMicrosoft spent roughly $32 billion to bring additional compute capacity onlinewhich means the company is on track to spend another $158 billion between now and Christmas.

According to CFO Amy Hoodnext 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 Streetand understandably so given that in the last four quartersMicrosoft 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 yearbut still short of achieving obvious ROI.

In her prepared statements ahead of Microsoft’s Q3 earnings callHood 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 usageas 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 OpenAIafter they opened their relationship to other models and clouds earlier this week.

While Microsoft's AI business can't quite pay the bills yetits cloud biz is making bank.

In Q3Microsoft'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 revenueat $54.5 billionan increase of 29 percent compared to this time last year.

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Azure may be a cash cowbut Microsoft’s personal computing bizwhich spans PCsgamingand Bingsaw 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 quarterHood 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. ®