Microsoft Stock Price Hangs on One Number: $625 Billion

Right now, Microsoft is experiencing an odd silence, the kind that appears prior to an earnings release that everyone says they are not anxious about. The same divided personality can be seen when you walk into any trading desk or browse a finance feed. bullish but cautious. assured, but keeping an eye on the exits.

Tech is doing what it always does, supporting the index, and the Nasdaq recently reported its longest run of gains since 1992. Microsoft is included in that. It contributes to the discomfort as well. The four cloud giants, including Microsoft, are expected to spend about $635 billion this year, according to a Reuters report this week. It’s not a rounding error. It’s a generational wager, and it’s unclear when the money will start to return.

Along with Alphabet and Meta, Microsoft releases fiscal third-quarter results following the close on April 29. On the same day, three of the biggest names in AI were announced. It almost seems theatrical. More than anything else, investors will be keeping an eye on whether the capex line begins to erode margins before the revenue line catches up.

Both sides of the debate were presented in the December quarter. Revenue increased by 17% to $81.3 billion. Cloud services, including Azure, increased by 39%. The contracted-but-not-yet-recognized pile, or commercial remaining performance obligation, increased by 110% to $625 billion. It’s the kind of number you underline twice, and it’s astounding. However, the $37.5 billion capital expenditure figure—which has increased by almost 66%—has been sitting in analyst notes like a pebble in a shoe.

Stefan Slowinski of BNP Paribas maintained his Outperform rating but lowered his price target from $659 earlier this month to $556. His statement that Microsoft has not been spared by the “SaaS Smash” was quoted in TheStreet. It’s a clever way of saying that Redmond was also affected by the larger software pullback. In response, Mark Moerdler of Bernstein offered a softer perspective, characterizing the discrepancy between revenue and expenditure as a timing problem rather than a fundamental one. Both may be correct. They might be.

The scope of Microsoft’s claims is what sets its story apart. Satya Nadella made the seemingly casual claim in January that the AI division was bigger than some of the company’s largest franchises. According to Amy Hood, Microsoft Cloud’s revenue for the quarter exceeded $50 billion. M365 Copilot, a $30-per-month assistant marketed to business clients, has 15 million yearly users, according to Nadella. These are large numbers expressed with the ease of a person accustomed to large numbers.

The competitive landscape isn’t improving, though. Compared to Azure’s 39% growth in the most recent quarter, Google Cloud grew by 48%. Apple is one of the major clients that Google’s model family, Gemini, has been gaining. Any softness in Copilot adoption would hurt more than it used to, and Microsoft cannot afford a weak Azure quarter.

Beneath all of this, there is a more subdued concern that isn’t always included in earnings previews. According to BNP Paribas economists cited by Reuters, a significant portion of the productivity gains AI is expected to provide could be subtly eliminated by growing electricity costs. It’s the kind of risk where a stock doesn’t move on any given day until one day it does. As this develops, it’s difficult to avoid thinking of April 29 as more of a referendum than an earnings date. on the expenditures. on the chronology. When the bill keeps growing, is patience still a virtue?