Microsoft’s $627 Billion Backlog Signals Demand, But AI Spending Spooks Investors
Published on 05/01/2026 at 13:30 | Redaktion boerse-global.de
Microsoft’s third-quarter earnings for fiscal 2026 tell a story of two extremes: a commercial order book swelling to unprecedented heights, and a cash flow squeeze that has investors questioning the price of AI dominance. The Redmond-based tech giant posted $82.9 billion in revenue, up 18% year-over-year, while earnings per share landed at $4.27 — comfortably ahead of the $4.06 analysts had penciled in. Yet the stock closed at $407.78 on April 30, down roughly 12% since the start of the year, marking its worst quarterly performance since 2008.
The disconnect lies in the cost of building the future. Microsoft poured $30.9 billion into capital expenditures during the quarter, a figure that swallowed up much of its $46.7 billion in operating cash flow. Free cash flow fell to $15.8 billion, a 22% decline from the same period last year. Gross margins slipped to 67.6%, the lowest level since 2022. For the full fiscal year, the company expects to spend roughly $190 billion on infrastructure — a 61% jump from 2025 — with CFO Amy Hood noting that higher component prices alone account for $25 billion of that increase.
Azure Accelerates, Copilot Gains Traction
The cloud business remains the engine of growth. Azure expanded 40% in the quarter, beating both internal forecasts and Wall Street expectations. Total cloud revenue reached $54.5 billion. CEO Satya Nadella disclosed that the AI business is now on track to generate $37 billion in annualized revenue, more than double the pace from a year ago.
Microsoft 365 Copilot is proving to be a significant driver. The AI assistant now counts 20 million paid users, up from 15 million in January. Seat additions surged 250% compared to last year. Accenture deployed over 740,000 licenses — the largest single deployment to date — while Bayer, Johnson & Johnson, Mercedes, and Roche each booked at least 90,000 seats. Usage intensity is also climbing, with Copilot queries per user rising nearly 20% sequentially. Hood indicated that net seat additions should accelerate further in the fourth quarter, which would boost average revenue per user.
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The commercial backlog — contracts signed but not yet recognized as revenue — reached $627 billion, a 99% increase year-over-year. That figure provides a concrete foundation for future earnings, even if near-term margins are under pressure.
A Historic Severance Program and OpenAI Reset
In a move unprecedented in its 51-year history, Microsoft has launched a voluntary severance program targeting roughly 7% of its U.S. workforce. With approximately 125,000 employees in the country, that could mean up to 8,750 people eligible for a paid exit starting in May. The company expects a $900 million charge in the current quarter. AI and Copilot teams are explicitly excluded from both the severance offer and the hiring freeze that has been in place since March — underscoring Microsoft’s strategic pivot away from traditional roles and toward artificial intelligence.
Meanwhile, the partnership with OpenAI has been fundamentally restructured. Under the new terms, OpenAI is free to serve customers through any cloud provider. The financial flow now runs in one direction only: Microsoft will no longer make payments to OpenAI, while OpenAI will continue to remit a 20% revenue share to Microsoft — but only through 2030 and subject to an undisclosed cap. Crucially, a clause that would have excused OpenAI from payments upon achieving artificial general intelligence has been removed. Truist analyst Terry Tillman noted that eliminating the outgoing payments provides a direct margin benefit.
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Wall Street Divided on Valuation
Analyst reactions to the quarter have been mixed. Barclays trimmed its price target from $600 to $545 while maintaining an “Overweight” rating. Wells Fargo nudged its target higher to $625 from $615. Bank of America’s Tal Liani kept a “Buy” rating with a $500 target, and Mizuho’s Gregg Moskowitz reiterated “Buy” at $515. Bernstein raised its target to $641, citing stronger-than-expected Azure growth. Citi also lifted its target to $620.
The central debate among analysts is whether Microsoft’s massive AI investments will eventually translate into expanding margins, or whether the spending will continue to outpace revenue growth. Hood acknowledged that the company remains capacity-constrained at least through the end of 2026, suggesting the capital expenditure cycle has further to run. Whether Azure can sustain its acceleration and whether capital outlays begin to moderate in the coming quarters will likely determine the stock’s trajectory. For now, the $627 billion backlog offers a powerful argument that demand is real — but investors are waiting to see if the profits follow.
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