Microsoft's Plunge: Bullish Spin Meets Cautious Realities

What happened

Microsoft's stock has underperformed the S&P 500 by 20.8%, leading a Seeking Alpha article to frame the decline as a gift, citing robust double-digit growth in Productivity & Business Processes and Intelligent Cloud segments driven by AI demand. However, DeepValue's analysis reveals this growth is underpinned by aggressive AI capex, with Microsoft Cloud gross margin at 67% and declining due to infrastructure investments, compressing free cash flow to $5.9B in Q2 FY26. Commercial remaining performance obligation (RPO) is $625B, up 110% YoY, but approximately 45% is concentrated with OpenAI, introducing significant counterparty risk to forward visibility. Key near-term proof points include Azure sustaining ~37-38% constant currency growth and capex moderating sequentially from Q2's $37.5B, which are critical for stabilizing margins and de-risking the bear narrative. The market narrative has shifted from AI product hype to capex payback concerns, making the stock highly sensitive to execution on these fronts rather than optimistic headlines.

Implication

Short-term, closely monitor FY26 Q3 results for Azure growth meeting ~37-38% guidance and capex decreasing sequentially, as failures here could signal demand deceleration or prolonged margin pressure. The high commercial RPO offers revenue visibility, but concentration with OpenAI requires vigilance for any renegotiation that might impair backlog quality. Post-March 2026, observe Copilot paid seat trends after promotions end to assess durable monetization versus discount-driven adoption. Balance sheet strength supports ongoing buybacks and dividends, but sustained capex intensity could limit free cash flow and valuation upside. Overall, the stock presents a potential buy if execution aligns with base case, but downside risks from margin erosion or growth slowdown warrant cautious position sizing.

Thesis delta

The Seeking Alpha article reinforces the bullish aspects of Microsoft's growth and capital returns, aligning with the positive elements of the DeepValue thesis. However, it overlooks critical risks such as capex intensity, margin pressures, and RPO concentration highlighted in filings. Therefore, the core thesis remains unchanged: the investment case hinges on converting AI spend into observable monetization over the next 1-2 quarters, with no material shift from this new commentary.