Microsoft falls to $390 as AI capex fears create contrarian entry

Microsoft Corp. reported commercial remaining performance obligations of $627 billion, up 99% year over year, as the company's AI infrastructure spending draws a sharp divide between bulls and bears.

"The demand signals are stronger than we've ever seen, and we remain confident in the return on these investments," Amy Hood, chief financial officer at Microsoft, said on the earnings call.

Shares trade at $390.34, down 22.13% over the past year and 18.93% year to date, even as the company delivered four straight earnings beats. The S&P 500 gained 9.6% year to date over the same period, creating a roughly 40-point gap of relative underperformance. Microsoft Cloud revenue reached $54.5 billion last quarter, up 29% year over year, while AI annual run rate hit $37 billion, growing 123%. Azure ran at 40% growth and Copilot seats climbed 250% year over year.

The bull case rests on a $627 billion contracted backlog that converts to revenue on schedule, backed by $190 billion in planned calendar 2026 capital expenditure. Return on equity stands at 33.28% and operating margin at 45.62%, indicating spending has not yet broken profitability. The bear case centers on Q3 capex of $30.88 billion, up 84.39% year over year, and OpenAI-related losses that widened to $3.1 billion in Q1 FY26 from $523 million a year earlier. Free cash flow declined 3.32% in FY25 as reinvestment accelerated.

Azure Growth Is the Linchpin

The thesis breaks if Azure growth prints below the mid-30s, if capex intensity climbs without matching bookings, or if OpenAI losses meaningfully compress consolidated margins. None are visible in current data. Management expects "another year of double-digit revenue and operating income growth in FY '27," Hood said, adding that supply will "remain constrained at least through 2026." Constrained supply against contracted demand creates a favorable pricing environment.

Consensus analyst target sits at $557.79, implying 43% upside. The full-chain put/call ratio of 0.44 shows options traders are not positioned for further decline, and Polymarket assigns an 89.5% probability of a Q4 earnings beat. The next Azure growth print and Q4 capex disclosure land within days.

The guidance raise signals management expects AI demand to accelerate. Investors will watch the next earnings call for updated segment margins and Azure growth trajectory.

This article is for informational purposes only and does not constitute investment advice.