Bottom line: While Microsoft continues to ride the AI wave, Xbox continues to struggle. New CEO Asha Sharma recently began implementing plans for a radical course correction, but it is still too soon to predict their impact. The company's fourth-quarter financial results for 2026 show a 10% fall in Xbox content and services and a 13% decline in hardware revenue, while Microsoft's overall profits jumped by 31%.
While Xbox's 13% YoY drop in hardware revenue is not as bad as last quarter's 33% plummet, it still caps off a full year of uninterrupted declines. Price hikes and worrying PR surrounding the brand are likely the primary factors, and the situation is expected to worsen when Xbox Series S|X consoles become at least $100 more expensive starting in August.
Xbox content and services revenue also fell by 10% YoY this quarter, compared with a 5% decline last quarter, which Microsoft again attributed to strong performance during the same quarter last year. The company is likely still referring to titles such as Call of Duty: Black Ops 6 and Minecraft, but this past quarter saw the release of one of Microsoft's most successful titles, Forza Horizon 6.
– ASHA (@asha_shar) July 29, 2026
During the Q4 earnings call, Microsoft CEO Satya Nadella expressed hope for Xbox to return to profitability in fiscal year 2027. Asha Sharma, who replaced Phil Spencer as Xbox CEO in February, has already begun implementing changes to that end, some of which are controversial.
To boost hardware sales, the company is partially reversing its policy of releasing in-house titles, such as Gears of War E-Day, on rival platforms. Microsoft also confirmed a renewed push for major franchises such as Fallout and The Elder Scrolls. However, rolling layoffs affecting 3,200 positions this year and the loss of five game studios have drawn sharp criticism and sown doubts about future game development at Xbox.
Meanwhile, the AI boom continues to lift Microsoft's overall fortunes. Revenue increased 18% YoY, and profits rose 31%, both in Q4 and for FY26 overall, mostly due to cloud and AI services. The company announced that Azure revenue exceeded $100 billion for the first time this year.
Although tech giants remain bullish on AI, the boom's longevity remains unclear. Apple recently regained its status as the world's most valuable company and joined the $5 trillion club, largely because it has kept AI at arm's length, causing investors to see it as an island of stability.