Microsoft hikes 2026 AI spending by $25 billion to cover component price rises

If rising hardware costs have been painful, Microsoft is feeling it too. Microsoft has recently revealed that its capital expenditure for 2026 is expected to reach $190 billion, with around $25 billion driven by escalating component costs.

Prices for memory and storage have surged sharply since last autumn, in some cases more than tripling in price, largely due to soaring demand for AI infrastructure. Even so, the company remains firmly committed to leading the AI race. In the last quarter alone, Microsoft invested about $32 billion to expand compute capacity, putting it on track to spend an additional $158 billion before year-end.

According to CFO Amy Hood, the company plans to spend roughly $40 billion next quarter toward hardware and the data centers required to support it. Hood said that despite spending megabucks “we expect to remain constrained at least through 2026.”

This aggressive infrastructure push has raised concerns among investors. Over the past four quarters, Microsoft has spent approximately $97 billion on infrastructure and equipment, generating $37 billion in annual recurring revenue (ARR) from AI services. While that ARR has grown 123% year over year, it still falls short of delivering a clear return on investment.

In her prepared remarks ahead of the company’s Q3 earnings call, Hood sought to reassure stakeholders, emphasizing confidence in long-term returns. "We remain confident in the return on these investments given higher demand signals and increasing product usage, as well as the efficiencies we're already driving across the platform," she said.

Cost pressures may also be behind Microsoft’s recent move to shift GitHub Copilot from a subscription-based model to pay-per-token pricing. The change coincides with a broader evolution in its partnership with OpenAI, as both companies expand collaborations across different models and cloud platforms.

While Microsoft’s AI business is still maturing financially, its cloud division continues to perform strongly. In Q3, profits rose 23% year over year to $31.8 billion on revenue of $82.9 billion, with cloud contributing more than half—$54.5 billion, up 29% from the previous year.

However, its personal computing segment, which includes PCs, gaming, and search saw a slight decline. Revenue dipped 1% to $13.2 billion, impacted by a 2% drop in Windows sales and a 5% decline in Xbox content and services. Growth in Bing search revenue helped partially offset these losses.

Looking ahead, the company expects Windows OEM revenue to decline in the mid-teens next quarter. Still, the broader outlook remains positive, with Microsoft projecting Q4 revenue growth of 13–15% year over year, reaching between $86.7 billion and $87.8 billion.