Last Update 02 May 26
Fair value Increased 18%Microsoft Just Had a Quarter for the History Books. I Still Haven't Bought a Share.
In late March I told you the fundamentals were a fortress and the price had not caught up to the fear yet. The fear faded. The price ran before the quarter was reported. And the lesson, as it almost always is when business quality and stock price decouple this fast, is patience.
Six hundred and twenty-seven billion dollars.
That is Microsoft's commercial remaining performance obligation as of March 31st. Contracts signed, products and services owed to customers over the coming years. Including OpenAI, the number rose 99% year over year to $627 billion. Excluding OpenAI, commercial RPO grew 26%, which is still large but materially less sensational.
For perspective, that backlog is larger than the annual gross domestic product of Norway and within sight of Walmart's $713 billion fiscal-year 2026 revenue. It belongs to a single line item on a single company's earnings call.
In late March I sat down to write about Microsoft. The stock closed at $356.77 on March 27. The capital expenditure line had Wall Street spooked. I argued the fundamentals were a fortress the market had stopped reading. A little more than a month later, ahead of the after-close Q3 release on April 29, the shares closed at $424.46. The business argument got confirmed by the print. The stock reaction was messier: shares gave back part of the pre-earnings move the next day.
This is the part where I am supposed to tell you I bought heavy near the March low and was up nineteen percent at the April 29 close.
I did not. I am not. And I am going to explain why that is the right answer, even though the price action says otherwise.
What the Quarter Actually Said
Let me deal with the report itself, because the headline numbers do not do it justice.
Revenue: $82.9 billion. Up 18% year over year.
Operating income: $38.4 billion. Up 20%.
Diluted earnings per share: $4.27. Up 23%.
Operating margin: 46%. The kind of profitability you usually only find in luxury goods or oil-and-gas royalties.
Microsoft Cloud, the consolidated cloud line, did $54.5 billion in a single quarter. That is 29% reported growth and 25% constant-currency growth. Twelve months earlier the same line grew 20% reported and 22% in constant currency. Hyperscale cloud businesses usually decelerate as they scale. This one accelerated.
Azure and other cloud services grew 40% on a reported basis. The competitive read is strong, but it is not clean enough to turn into a single scoreboard. Amazon's AWS grew 28% in Q1 2026, and Google Cloud grew 63% from a smaller base. Microsoft does not disclose Azure revenue dollars, so claims about incremental Azure dollars versus AWS and Google Cloud are estimates, not reported facts.
M365 Copilot, the AI productivity layer that sells for thirty dollars per seat per month on top of an existing subscription, crossed twenty million paid seats. Net additions accelerated 250% year over year. Do that math out for a moment. A subscription business adding seats faster than the year before, at a higher price than legacy productivity software, with margins that compound as the underlying infrastructure depreciates against ever-larger volume. There is not a more attractive shape of revenue in capitalism.
And then there is the AI annual revenue run-rate figure. Microsoft pegged it at more than $37 billion, up 123% year over year. Whatever you think about generative AI as a long-term phenomenon, the customer behavior captured in those numbers is unambiguous. Enterprises are not only experimenting. They are committing budget.
The Number That Surprised Even Me
I want to single out one figure because it is genuinely remarkable, and I have not seen anyone in financial media give it the attention it deserves.
Commercial RPO grew 99% year over year.
Take a moment with that, but keep the denominator honest. We are talking about over six hundred billion dollars in contracted future business, and the number nearly doubled in twelve months, but the 99% headline includes OpenAI. Excluding OpenAI, commercial RPO grew 26%. That is still exceptional for a company this large, but it is not the same thing as broad customer commitments doubling organically.
Microsoft said the RPO balance has a weighted average duration of roughly two and a half years, with about 25% expected to be recognized over the next twelve months. That gives real visibility, but it also means the backlog converts over time and should not be treated like cash in the bank.
If you wanted a single piece of evidence that AI infrastructure demand is real, this is it. It is not proof that every dollar of CapEx will earn an attractive return. It is evidence that Microsoft has signed demand behind a substantial part of the buildout.
The CapEx Story Got Bigger
In January, Microsoft reported $37.5 billion of quarterly capital expenditures, and the market treated the number like evidence Satya Nadella had lost the plot.
CFO Amy Hood used the Q3 call to guide investors to roughly $190 billion of capital expenditures for calendar year 2026. About $25 billion of that is attributable to higher prices for components, the rest is more data centers, more servers, more silicon, more electrical capacity from the grid.
A hundred and ninety billion dollars. Spent in twelve months. By one company. On one strategic priority.
The bear case writes itself, and I want to give it its due. Capital expenditures were $31.9 billion in the quarter. Free cash flow was still positive at $15.8 billion after those outlays, but the gap between operating cash generation and infrastructure spending is now central to the thesis. If the AI workload thesis cracks even a little, that math gets ugly fast.
Here is the narrower bullish answer. A company does not spend $190 billion on infrastructure unless it has signed contracts and seen demand patterns that management believes justify the spend. The $627 billion RPO balance, even with OpenAI included, gives Microsoft more visibility than most companies ever get. The CapEx is a bet with evidence behind it, not a free lunch.
The risk is not only overspending. The risk is timing, mix, pricing, component inflation, and whether the capacity comes online fast enough to convert demand into high-margin revenue.
What Changed in the Moat
Now I have to update the picture I painted in March.
In April, Microsoft and OpenAI announced an amended partnership agreement. The press release used careful language. The substance is this: OpenAI can now serve its products across any cloud provider. Microsoft remains the primary cloud partner, and OpenAI products are still supposed to ship first on Azure unless Microsoft cannot and chooses not to support the required capabilities, but Microsoft's license is now non-exclusive.
Microsoft kept the model and product IP license through 2032. OpenAI's revenue share payments to Microsoft continue through 2030, at the same percentage but subject to a total cap, and Microsoft no longer pays a revenue share to OpenAI. Microsoft also continues to hold the approximately 27% diluted stake in OpenAI Group PBC that was valued at roughly $135 billion in the October 2025 transaction. So the equity value is real, the IP access is preserved, and the revenue share continues in modified form. The exclusive distribution moat I leaned on in March, however, is narrower than it was.
Is this a thesis-breaker? No. The integration depth between Azure and the OpenAI product surface, ChatGPT Enterprise included, is still unmatched. Enterprise procurement gravitates toward the path of least resistance, and the path of least resistance is still through Azure for most existing Microsoft customers. But it is honest to say that the structural protection has weakened, and the fair value calculation needs to reflect that.
I am also watching the regulators more carefully than I was in March. The UK Competition and Markets Authority is launching a Strategic Market Status investigation into Microsoft's business software ecosystem starting in May 2026. A UK tribunal ruled that Microsoft must face a mass claim over cloud licensing, with claimant lawyers valuing it at roughly £2.1 billion. The European Commission has Digital Markets Act cloud market investigations open. Brazil's competition authority is looking at Microsoft cloud and software licensing practices. Switzerland's COMCO opened a preliminary investigation into licensing fees. None of these are existential individually. Stacked together, they are a meaningful regulatory overhang.
The sell-side picture is mixed rather than uniformly negative. Baird cut its target from $540 to $500 in mid-April. Wolfe's move from $625 to $530 and Wells Fargo's earlier trim to $615 were post-Q2 actions, not direct reactions to this quarter. After Q3, Wells Fargo reportedly raised its target to $625. The better conclusion is not that Wall Street all cut. It is that reasonable people are putting very different numbers on the same business.
The Updated Math
In March I valued Microsoft at roughly $393 to $400 per share with a conservative discounted cash flow analysis. The Q3 print, the CapEx clarity, and the moat adjustments produce a different number now.
Base case fair value: $466 per share.
Bull case: $804 per share.
Bear case: $229 per share.
These are my model outputs, not reported company facts. They should be treated as assumptions unless the underlying DCF is audited separately.
The base case improved because the earnings power got bigger, operating margin held around 46%, and the contracted backlog provides multi-year visibility I could not give credit to before. The bear case got worse because the regulatory environment is more hostile, the OpenAI exclusivity has loosened, and the 99% RPO growth headline needs OpenAI context.
At the April 29 close of $424.46, the discount to base case fair value was roughly 9%. At the May 1 close of $414.44, the discount was roughly 11%. The conclusion is the same.
A 9% discount is not enough. Not for a business of this caliber, and not for me. I want a 25% cushion between what I think a business is worth and what I am willing to pay for it. The arithmetic gives me a target buy price of $349.50.
That is about $65 below the May 1 close. Roughly 16% lower. Microsoft would need a meaningful pullback, not a crash, to get there. A weak quarter on Azure growth. A regulatory ruling that lands harder than expected. A broader market correction triggered by something unrelated to Microsoft entirely. Any of these would do it.
If it doesn't get there, I do nothing. I have other businesses on my list, and I do not have to play this hand.
What This Costs Me, and Why I Don't Care
Let me address the obvious objection. If I had bought at the March 27 close of $356.77, I would have been up 19% at the April 29 close. That kind of return funds vacations.
I missed it. I will miss things like it again. I will miss them many times.
The reason I will not change the discipline is that the only way to consistently miss the disasters is to consistently miss the rallies that came right before them. The investor who bought MSFT near the 2025 highs is still meaningfully underwater. The investor who bought at $356.77 in late March was up 19% at the April 29 close. Same business. Same management. Same trajectory. The only variable was the price they paid.
From the 2025 high near $555 to the late-March 2026 low near $356, Mr. Market marked Microsoft down roughly 36%. By April 29, before the after-close earnings release, the stock had recovered to $424.46, then gave back part of that move the next day. The pattern repeats endlessly. The only edge a long-term investor has, the only one that matters, is refusing to pay full price for excellence.
I quoted Ted Williams in the last piece, the part about waiting for the right pitch. He said something else worth remembering. He said that a hitter who chases bad pitches never gets to be a great hitter, no matter how much talent he has, because the pitcher will keep finding a corner of the strike zone the hitter cannot resist. The discipline is the talent.
What This Means For The Decision
If I had bought Microsoft when it was down, I would not be selling solely because the stock bounced. The thesis got stronger. The numbers came in. The contracted backlog gives visibility into the next several years, even after adjusting for the OpenAI effect.
If I am waiting, I keep waiting. The job did not get easier, but the math did not get worse. $349.50 remains the level where my margin of safety becomes large enough to act on.
For someone who bought near the 2025 highs and is sitting on a loss, the point is not to make a panic decision because one earnings cycle feels emotionally bad. The business that exists today is materially better than it was then, but the price paid still matters. Holding through a paper loss can be rational when the value line and the price line move on different schedules, but that judgment depends on the investor's own time horizon, concentration, taxes, and opportunity cost.
The 10-Q is on the SEC website. It is free. It is shorter than the 10-K. Read it. The CFO commentary on the calendar-2026 CapEx guide is on Microsoft's investor relations page. Read that too. You should not be making a multi-year decision about an iconic business based on what a guy on television told you about it.
The fear is lower. The fundamentals are confirmed. The price moved before I could act, then reminded everyone that earnings reactions are not linear. That is the game. You do not get to win every hand. You only have to win the ones you choose to play.
I will let you know when I do.
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*The author still holds no position in Microsoft Corporation as of this writing. This essay is not investment advice. It is an invitation to do your own homework, ideally with a calculator and the actual filings in front of you.*
Microsoft just burned $37.5 billion in 90 days. The stock has lost a third of its value. And the most important number on the balance sheet is the one nobody's talking about.
Thirty-seven point five billion dollars.
That's how much Microsoft spent on capital expenditures last quarter. One quarter. Ninety days. Enough to buy every cattle ranch in the state of Nebraska, twice, and still have change left over for a reasonably nice steak dinner.
Wall Street saw that number on January 28th and did what Wall Street does. It panicked. The stock dropped 10% the next morning. It has kept sliding since. As I write this, Microsoft trades at $356.77, down 34% from its October high of $539. The market has erased roughly $1.3 trillion in value in five months.
The headlines write themselves: "Microsoft's AI Gamble." "The $150 Billion Bet That Could Backfire." "Is Satya Nadella Burning Cash?"
If you've been investing for any real length of time, you've watched companies incinerate capital on fiber optic cable in 2000, on subprime derivatives in 2007, and on cryptocurrency exchanges in 2022. Another round of "this time is different" triggers a very rational immune response. I feel it too.
But I've spent the last week pulling apart Microsoft's actual filings. Not the analyst summaries. Not the headlines. The 10-Q, the earnings transcripts, the segment disclosures, the cash flow statements. And what I found is a business so fundamentally healthy that the current panic looks less like prudent skepticism and more like a misreading of the financial statements.
The crowd is staring at the CapEx line. They should be reading the balance sheet.
The Cash Machine Nobody Mentions
Microsoft just completed a fiscal year in which it earned $101.8 billion in net income. That is not a typo. One hundred and one point eight billion dollars in profit. No software company in the history of capitalism has ever done that.
Revenue hit $281.7 billion, up 15% from the year before. Operating income reached $128.5 billion, a 17% increase. The operating margin expanded to 45.6%. Think about what that means. For every dollar that flows through Microsoft's front door, forty-five cents and change falls straight to the operating line before the tax collector arrives.
Now, free cash flow. This is the number I care about most because it represents the actual cash a business generates after it has paid for everything it needs to keep running. Microsoft's came in at $71.6 billion. That is not revenue. That is not operating income. That is cash left over after paying every employee, every supplier, every tax bill, and every capital expenditure. Seventy-one billion in cash that the company can do whatever it wants with.
Here's the part that genuinely surprised me, because it contradicts the narrative you're hearing on financial television. Microsoft holds $89.4 billion in cash and short-term investments against roughly $40 billion in total debt. Read that again. The company could write a check tomorrow to pay off every cent it owes and still have $49 billion left in the account.
Microsoft is not leveraged. It is not stretched. It has a net cash position of $49 billion. The company paid about $24 billion in dividends last fiscal year. It could cover nearly four years of dividend payments from its cash reserves alone, without earning another dollar. Most companies can't cover four months.
There's an old-fashioned test called the Piotroski F-Score. Nine points. It checks whether profits are real, cash flow exceeds earnings, and leverage is declining. Simple stuff that has held up for decades. Microsoft scores a 7 out of 9. The two missed points? Gross margins ticked down slightly because of AI infrastructure costs, and asset turnover declined because the company is building data centers faster than revenue can fill them. Both are consequences of investing, not deteriorating.
A business that generates $71.6 billion in free cash flow, maintains a 45.6% operating margin, earns roughly 28 cents of profit on every dollar of invested capital, and holds a net cash position of $49 billion is not a business in crisis.
It is a business that Mr. Market has decided to put on clearance because the CapEx line got too big for a spreadsheet.
The Spending Is the Signal. Not the Problem.
Here's the part the frightened money doesn't understand.
Microsoft isn't spending $37.5 billion a quarter because Satya Nadella lost his mind. It's spending $37.5 billion a quarter because customer demand for Azure cloud computing is growing at 39% per year and the company literally cannot build servers fast enough.
Sit with that for a moment. Azure, Microsoft's cloud platform, grew 39% in the most recent quarter. Amazon's AWS, the market leader, grew 24%. Google Cloud managed 48% but from a considerably smaller revenue base, so the absolute dollars tell a different story. In the cloud infrastructure market, which now exceeds $400 billion annually, Amazon holds 28% share, Microsoft holds 21%, and Google holds 14%.
Those three companies control two-thirds of the market. The barriers to entry are almost comically high: tens of billions in capital, a global network of data centers, deep relationships with enterprise procurement departments, and armies of engineers who don't exactly grow on trees. No new competitor has gained meaningful share in a decade. This is not a market. It is an oligopoly. And Microsoft is the fastest-growing member.
When a company with these economics tells you it is spending aggressively to meet demand that exceeds supply, the correct emotional response is not fear. It is gratitude. You are watching a toll bridge operator widen the highway because traffic has doubled.
The moment Microsoft says "we've decided to slow down our infrastructure spending because demand is softening"? That is the day to be frightened. That would mean the AI workload growth story has cracked. That would mean the enterprise customers writing hundred-million-dollar Azure commitments have pulled back. That would mean the $625 billion in commercial backlog is evaporating.
None of those things are happening. The opposite is happening.
Microsoft brought one gigawatt of data center capacity online in a single quarter. And it still wasn't enough. The company's CFO told analysts that capital expenditures will decrease sequentially in the next quarter, and before you get excited, it's not because demand is weakening. It's because of "normal variability in the timing of delivery of finance leases." In plain English: they are constrained by how fast they can physically plug buildings into the power grid.
I've been studying capital allocation decisions for most of my adult life, and I cannot recall a single instance of a company spending $37.5 billion in ninety days and having its Chief Financial Officer essentially tell analysts: "We wish we could have spent more."
Three Moats, Stacked
Buffett has always said he wants to own businesses surrounded by a moat filled with piranhas. Microsoft's moat is unusual because it's really three moats stacked on top of each other, and they feed into one another in ways that I think the market underappreciates.
Start with switching costs. More than a billion people use Microsoft 365. Every Fortune 500 company runs on Active Directory, Outlook, Excel, and Teams. I've talked to CIOs who have tried to migrate off this stack. The cost isn't measured in licensing fees. It's measured in years. Years of lost productivity, retraining, integration headaches, and the career risk that falls on whoever signed off on the project. Nobody does it unless they're absolutely forced to. This is why the Productivity and Business Processes segment grew 13% to $120.8 billion, even in a year when plenty of companies were tightening every other budget line.
Then there's scale. Running a global cloud infrastructure network requires tens of billions in annual capital investment, relationships with power utilities on six continents, and custom semiconductor design capabilities. There are exactly three companies on Earth that can do this profitably. Oracle, to its credit, has tried. They committed $50 billion in planned capital expenditure for a single fiscal year, and they still hold low-single-digit market share. That should tell you something about the height of these walls.
And finally, there's the OpenAI partnership. This one is newer and harder to value, but I think it matters enormously. Microsoft has exclusive commercial rights to integrate OpenAI's foundational models into Azure and its application layer. Every enterprise customer that wants GPT-class AI capabilities through a major cloud provider has exactly one first-party option. Competitors can offer their own models, and they do, but the integration depth between Azure and OpenAI is something that cannot be replicated through a licensing deal. You either built it together from the ground up or you didn't.
Here's where it gets interesting. These moats don't just sit next to each other. They compound. An enterprise customer using Microsoft 365 adopts Copilot AI features within the same subscription. Copilot runs on Azure. Azure runs on OpenAI models. Each layer makes the next stickier, and each dollar of revenue in one segment quietly reduces the customer acquisition cost in the others.
Coca-Cola has a flywheel. Costco has one. But I'm not sure either spins this fast with this much capital behind it.
The Regulators Are Real. And They Should Be.
I won't pretend the risks are imaginary. They're not.
The U.S. Federal Trade Commission has an active antitrust investigation examining whether Microsoft is using its dominance in productivity software to funnel customers into Azure through punitive licensing terms. The investigation is real, it is ongoing, and civil investigative demands were issued as recently as early 2026.
In Europe, the Digital Markets Act has designated Microsoft as a "gatekeeper," imposing interoperability and compliance mandates. The UK Competition and Markets Authority published a final report in July 2025 concluding that "competition is not working well" in cloud infrastructure markets, with Microsoft's licensing practices specifically cited.
These are not nuisances. If regulators forced Microsoft to make Microsoft 365 run equally well on AWS and Google Cloud as it does on Azure, that would materially damage the flywheel I just described. In a severe scenario, that kind of forced separation could compress fair value by 40% or more. I don't dismiss this.
But those of us who have been around a while remember something. Microsoft has been here before. The 1998 Department of Justice case nearly broke the company apart. Judge Thomas Penfield Jackson actually ordered a breakup. It didn't happen. The regulatory process ground on for years, resulted in a consent decree, and Microsoft emerged with its core business intact. It was a circus then, and the current investigations have a similar theatrical quality to them.
I'm not predicting the same outcome this time around. What I will say is that antitrust investigations, in practice, move slowly, settle frequently, and rarely produce the structural separations that bears build into their worst-case spreadsheets. The probability-weighted impact is real but, in my judgment, not existential.
Meanwhile, the earnings power of the underlying business compounds every quarter while the lawyers file motions. That's the part nobody prices.
A Wonderful Business. Not Yet a Wonderful Price.
Here's where discipline separates investors from speculators.
At $356.77, Microsoft trades at roughly a 10% discount to a conservatively modeled intrinsic value of approximately $395 to $406 per share. That intrinsic value assumes 14% free cash flow growth for five years, a slowdown to 10% for the following five, a terminal growth rate of 3.5%, and a discount rate of 8.5%. It accounts for the CapEx drag. It does not assume the bull case.
A 10% discount on a magnificent business is attractive. But it is not attractive *enough.*
When I buy a stock, I want a margin of safety. A gap between what the business is worth and what I'm paying that's large enough to protect me from the things I cannot foresee. For a business of this caliber, I want at least 25%. That puts my buy price at roughly $296 to $304 per share.
Microsoft would need to decline another 17% from here to reach that level. Is that possible? In this market, absolutely. The stock has already fallen 34% from its high. Tariff escalation, a broader tech selloff, or a disappointing quarter of Azure growth could easily push it there.
And if it doesn't get there? That's fine too. There are 40,000 publicly traded companies in the world. I don't need to swing at every pitch. Ted Williams became the greatest hitter in baseball by waiting for the ball to cross the plate in exactly the right spot. He let plenty of good pitches go by. So can I.
What This Means For You
If you already own Microsoft, the case for holding is strong. The business has never been more profitable, the balance sheet has never been more secure, and the competitive position has arguably never been wider. Selling because the stock is down 34% while earnings are up 16% is the precise opposite of rational behavior. You would be selling a business that is getting better because its price is getting lower. That is Mr. Market's game, and you don't have to play it.
If you don't own Microsoft and you've been waiting, keep waiting. But stay alert. A recession, a tariff war, or a single quarter of weaker Azure guidance could hand you this business at a price that would make your grandchildren wealthy. Set your limit orders. Be patient. The market rewards discipline far more reliably than it rewards urgency.
The numbers are all there in the 10-K. It's free. It's on the SEC's website. It's only 120 pages. I've read worse. I've read most of them, actually.
The fundamentals have never been stronger. The price just hasn't caught up with the fear yet. Sometimes it works the other way around. That's when the real money gets made.
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*This narrative is not investment advice. It is an invitation to do your own homework, ideally with a calculator and the actual filings in front of you.*
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Disclaimer
tripledub is an employee of Simply Wall St, but has written this narrative in their capacity as an individual investor. tripledub holds no position in NasdaqGS:MSFT. Simply Wall St has no position in any companies mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimate's are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
