MSFT's Xbox Business Has Become 'Almost Irrelevant', Says Analyst — ‘Every Investment Dollar Now Is Going To AI’

During an interview with CNBC, DA Davidson’s Gil Luria said that every dollar of Microsoft's investment is going toward funding its AI efforts and data centers.

• Luria added that Microsoft’s AI bet has taken priority over its gaming efforts, with the software giant realizing bigger markups from its data centers than it would from games.
• He said that the narrative around Microsoft has turned very negative, while noting that the two bear cases about the company’s prospects are contradictory.
• Luria added that the negative narrative around Microsoft is an opportunity and that he expects the company to report accelerating Azure growth.

Microsoft Corp.’s (MSFT) Xbox business has become “almost irrelevant,” according to DA Davidson's Head of Technology Research, Gil Luria.

During an interview with CNBC, Luria said that Microsoft is directing its investments to fund its AI efforts and data centers.

“That was the growth engine before AI... they just closed the Activision acquisition and they thought gaming was the move to accelerate growth. But obviously, since then, every investment dollar now is going to AI, to building data centers,” he said.

Microsoft shares were down over 1% in Monday's midday trade.

MSFT’s AI Bet Takes Priority Over Gaming, Says Luria

Luria added that Microsoft’s AI bet has taken priority over its gaming efforts because it earns higher returns from AI infrastructure than from gaming.

“AI drives more infrastructure software sales, then it drives more Office sales with Copilot. They have a much better place to invest right now. The gaming business doesn’t have much growth, so they might as well cut costs there in order to fund AI investment,” he said.

Luria’s comments come after Microsoft laid off around 4,800 employees, or 2.1% of its global workforce. The job cuts in the Xbox division stood at 1,600 on Monday, with another 1,600 roles set to be cut through fiscal year 2027. Cumulatively, the 3,200 role reductions account for about 10% of Xbox’s headcount, according to a CNBC report citing people familiar with the matter.

MSFT’s Xbox Head Says Business Is Not Healthy

In an email published on the company’s official portal, Xbox CEO Asha Sharma said that the business is not healthy, while adding that growth across the division’s portfolio has not kept pace with the company's expectations.

“We are operating at margins that are 3-10x lower than comparable platform and publishing businesses. We entered Gen 9 with a smaller install base and a higher cost structure,” she said.

Sharma added that the headcount reduction will affect Activision, Blizzard, King, Mojang, and Xbox Game Studios. “Our core business weakened, and we added more teams, more investment, and more time, hoping for a better outcome. And now the industry is facing the most severe hardware crisis in its history. We must reset Xbox,” she said.

In an official statement posted on Microsoft’s website, the company’s Chief People Officer, Amy Coleman, said that the roles being cut are not going to be replaced by AI. She also cautioned that similar changes will need to be made in other parts of Microsoft’s businesses.

“We are still early on this journey, and there will be more changes ahead; other parts of our business will need to make similar changes,” she said.

Luria Says Narrative On MSFT Has Turned Very Negative

Luria said that the narrative around Microsoft has turned very negative. He added that investors are overlooking Microsoft's strengths by buying into two conflicting bear cases, one that AI will erode software demand and another that the company is overspending on AI infrastructure.

He disagreed with both arguments, saying Microsoft's software business remains resilient while AI investments continue to support accelerating growth.

“The narrative on Microsoft has turned very negative, but that's an opportunity, because when they report in three weeks, they're going to report accelerating Azure growth and they're going to report capex growth that's at a lower rate than that,” he said.

Microsoft is scheduled to report its fourth-quarter (Q4) earnings on July 29, 2026. According to data from Fiscal.ai, Wall Street expects Microsoft to report 15% year-on-year revenue growth to $87.66 billion. The company’s earnings per share (EPS) is expected to rise to $4.24 from $3.65 in the same period a year ago.

What Retail Traders Think Of MSFT Stock

Retail sentiment on Stocktwits around Microsoft trended in ‘neutral’ territory at the time of writing.

MSFT stock is down 20% year-to-date and 23% over the past 12 months. The S&P 500 ETF (SPY) is up 20% over the past 12 months, while the Invesco QQQ Trust (QQQ) is up 30%.

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