Microsoft's Cloud Growth Shines Amid AI Capex and Supply Constraints

What happened

Recent reports indicate that cloud growth rates for Amazon, Microsoft, and Alphabet have reaccelerated in Q4 2025, driven by surging AI demand, with Microsoft potentially emerging as a winner. Microsoft's Azure segment showed robust 39% year-over-year growth in the latest quarter, supported by a 110% increase in commercial remaining performance obligation, signaling strong contracted demand. However, the DeepValue master report reveals extreme capital expenditures of $37.5 billion in FY26 Q2 and persistent supply constraints, which limit near-term revenue conversion and pressure margins through accelerating depreciation. Market sentiment has shifted towards a 'show me' narrative, where even high growth is scrutinized against record spending and capacity bottlenecks, raising investor skepticism. Consequently, while Microsoft benefits from AI tailwinds, the stock's premium valuation and operational challenges necessitate caution until proof of sustainable payoffs materializes.

Implication

The robust cloud growth reaffirms strong AI-driven demand, but Microsoft's high P/E of 25.5x leaves little room for error, requiring operational improvements to justify the premium. Key downside risks include capex remaining at or above $35 billion per quarter coupled with Azure growth decelerating below 30%, which could compress margins and trigger a bear scenario valuation of $330. Investors must monitor upcoming earnings for management commentary on supply constraints and commercial RPO conversion, as these will signal whether backlog is translating into recognized revenue. Upside potential hinges on Azure sustaining ≥35% growth with visible easing of capacity issues and stabilization of Intelligent Cloud gross margins above 67%. Given the WAIT rating and 3.5 conviction level, position sizing should be limited, with a re-assessment window of 3-6 months based on FY26 Q3-Q4 results.

Thesis delta

The news article confirms the demand strength embedded in the DeepValue thesis but does not alter the critical investment call. The thesis remains unchanged: upside requires Azure to sustain ≥35% growth while supply constraints are removed and margins stabilize, with no shift until observable changes in capex and conversion timing. Investors should await clearer signals from the next two quarters before adjusting their stance.