Microsoft's OpenAI Partnership Turns from Asset to Liability Amid Soaring Costs and Rich Valuation

What happened

Microsoft continues to deliver exceptional financial results, with FY25 revenue of $281.7B and Azure growth accelerating to 40% in Q1 FY26, fueled by strong cloud and AI adoption. However, the stock trades at elevated multiples of ~35x trailing EPS, and a conservative DCF suggests intrinsic value is ~72% below the current ~$488 share price, indicating limited margin of safety. A recent MarketWatch article notes that the once-celebrated OpenAI partnership is now seen as an 'albatross,' reflecting growing concerns over its financial and operational burdens. This aligns with the DeepValue report's findings of rising AI datacenter capex, significant lease obligations, and cloud gross-margin compression to 69%, which threaten profitability despite revenue growth. Overall, while business execution remains stellar, investor sentiment is dampened by valuation headwinds and the shifting perception of strategic AI investments.

Implication

The negative shift in perception of the OpenAI partnership adds to existing valuation concerns, potentially capping upside momentum in the stock. Persistent margin pressure from AI infrastructure spending and fixed lease obligations may erode free cash flow growth, even with robust revenue increases. Regulatory scrutiny and cybersecurity vulnerabilities pose significant downside risks that could abruptly impact earnings and investor confidence. For current holders, holding may be justified by the strong fundamentals, but new capital should wait for better entry points or clearer signs of margin stabilization. Key monitoring areas include cloud gross margin trends and regulatory outcomes, which will determine whether the current premium valuation is sustainable.

Thesis delta

The news reinforces the DeepValue report's 'WAIT' recommendation by highlighting that OpenAI-related risks are becoming more pronounced in market discourse, though it does not fundamentally change the core thesis. This underscores the need for heightened vigilance on partnership impacts, as any further deterioration in perception or financials could exacerbate valuation pressures. However, the shift is incremental, emphasizing existing cautions rather than prompting a new investment stance.