Wall Street Called It a Gamble. Microsoft Called It a Backlog. We’re About To Find Out Who’s Right

Microsoft has had a rough year. The stock has struggled even though every quarter this fiscal year has come in ahead of expectations. The company’s shares fell around 24% in the first quarter of the calendar year alone, mainly after the launch of Claude Opus 4.6, which triggered a sell-off across the whole software sector. This was the steepest quarterly drop for Microsoft since 2008. 

It can be argued that Microsoft is much more than just a software stock, and is therefore less at risk due to disruption from artificial intelligence. It is one of the few tech companies that are investing heavily in AI in a bid to get ahead of the rest of the pack. As a result, it is one of the largest spenders as well. This higher capex is partly responsible for the lack of stock performance.

Microsoft guided to roughly $190 billion of capital expenditure in 2026. Spending in the fiscal fourth quarter alone reached $41 billion, up 69% from just a year earlier. Microsoft spreads the cost of that hardware across the years it is expected to last, and the yearly charge is now large enough to hurt profit and cash flows. The company’s gross margins recently fell to the lowest level since 2022. Investors read it as an expensive bet on demand that might never arrive. That reading has a problem, though, as Microsoft has already sold the capacity. 

What the $678 Billion Order Book Actually Means

Microsoft reports a figure called commercial remaining performance obligation. This sounds technical, but it is simple. It is money customers have signed contracts for and have not yet spent. In other words, it is work already booked. 

That figure stood at $678 billion at the end of June, up 84% from a year earlier. To put this into perspective, Microsoft’s total revenue for the past year was around $318 billion. So the order book holds over two years of company sales, already committed. This changes what the capex is. Building a data center because you hope customers turn up is a bet. Building one because customers have already signed and you cannot serve them is not. 

CFO Amy Hood addressed this during the April earnings call. She said the pressure between Microsoft’s internal use of computing power and the demand for Azure would continue. The company, Hood said, was bringing capacity online as fast as it could. Azure grew 43% in the fourth quarter, ahead of Microsoft’s own guidance of 39%. A company that cannot build fast enough is not gambling on demand. 

The Price Rise Nobody Is Talking About

On July 1, Microsoft raised list prices across most of its commercial Microsoft 365 plans. The change was announced in December 2025 and covers Business, Enterprise, and Frontline plans. The increased prices range from around 5% for the top enterprise tiers to over 40% for some frontline plans. 

The reason this counts is that it costs Microsoft almost nothing to deliver. It is a price rise on software customers already use, needing no new data centers. While the market argues over whether billions in chips will earn a return, Microsoft is quietly raising the price of the business that already works. The money will arrive gradually, though, since existing customers keep their current prices until their contract comes up for renewal. 

A Cheaper Stock Than It Has Been In Years

Microsoft’s forward GAAP P/E of 22.52x sits 27% below its 5-year average of 30.81x. The forward Price-to-sales ratio of 8.80x is also 19% below its 5-year average of 10.88x. Both metrics suggest that the company is trading at a discount to its historical norms. The earnings outlook remains steady, with double-digit growth expected through at least 2029. Microsoft’s net debt of $47 billion looks manageable for a company worth roughly $2.90 trillion. 

Morgan Stanley analyst Josh Baer has backed the firm with a Buy rating and a $650 price target. His survey of chief information officers found technology budgets growing modestly in 2026, with Microsoft taking the largest share of that growth in software. Most of the CIOs he spoke to plan on spending more on both Azure and Microsoft 365 over the next year, and to move onto higher-priced plans. 

Where the Bears Have a Point

Critics argue that 45% of Microsoft’s backlog comes from OpenAI. This is a valid criticism as OpenAI has over $1.4 trillion worth of spending commitments, and it will need to raise money to fulfill those. This is also one reason why Wall Street often discounts headline RPO figures. 

However, Microsoft’s case deserves a deeper look. First, the company’s non-OpenAI backlog also grew 18%, which suggests the growth isn’t coming from one company alone. Secondly, the backlog becoming an OpenAI solvency story is true for most hyperscalers and chipmakers, and Microsoft has actually reduced its future reliance on the firm while Amazon and Alphabet have increased it. OpenAI and Microsoft revised their agreement on April 27 this year, allowing OpenAI to route new spend to AWS and Google Cloud instead of exclusively to Azure. This means future RPO growth is less likely to come from the Sam Altman-led firm.

What Happened on July 29

Microsoft announced its fiscal fourth quarter results on July 29. The stock went up over 10% after the announcement as the firm beat both top-line and bottom-line expectations. On the earnings call, CFO Amy Hood directly addressed the concerns surrounding increasing capex without a measurable ROI. Goldman Sachs analyst Gabriela Borges asked the CFO how she measures the ROI. While she didn’t give a concrete answer, she mentioned how efficiencies both in the enterprise application part of the business and infrastructure were helping the company. She also pointed out an increasing Total Addressable Market. The financial performance, Azure growth, and management’s comments have eased market concerns around the stock, which has had a rough time over the last 12 months.