Microsoft’s $250 Billion Problem Has a Name: OpenAI

Question: Microsoft beat earnings—why did the stock crater 7% after hours?

Because Azure growth is decelerating, and the OpenAI dependency has just become very visible. Q2 fiscal 2026 revenue was $81.27 billion versus $80.27 billion expected. EPS hit $4.14, up from $3.97 expected. Both beats. But Azure growth guidance for Q3 was only 37-38% at constant currency, barely meeting the 37.1% consensus.

Isn’t 37% cloud growth still phenomenal? Yes and no. Investors expected acceleration, not stabilization. More importantly, Microsoft disclosed that OpenAI represents 45% of its $625 billion commercial remaining performance obligation (backlog). That’s a massive single-customer concentration risk. More importantly, Microsoft guided for a slight dip in operating margins to roughly 45.1%, missing the 45.5% consensus, as the company ramps up AI infrastructure investments and capital expenditure.

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OpenAI is 45% of the backlog

OpenAI committed $250 billion in cloud spending during Q2, which inflated Microsoft’s backlog by 110% year-over-year. Strip out OpenAI, and the remaining backlog only grew 28%. That’s solid, but the optics are terrible. If OpenAI can’t generate enough revenue to actually pay Microsoft (and Oracle, and everyone else), this backlog is vapor.

What about margins?

Q3 operating margin guidance came in at 45.1%, below the 45.5% consensus. That’s the real problem. Microsoft is spending $37.5 billion in quarterly capex (above the $34.3 billion estimate) to build AI infrastructure, and margins are compressing rather than expanding.

Revenue guidance for Q3?

$80.65-$81.75 billion, midpoint $81.2 billion, exactly in line with consensus. No upside surprise. For a company supposedly leading the AI revolution, “in line” isn’t good enough.

Did anything go right?

The actual Q2 numbers were fine. $81.27 billion in revenue, up 17% year-over-year. $4.14 EPS on strong productivity software and cloud growth. Microsoft 365 Copilot now has 15 million paid seats. The business fundamentals are solid.

So why the market punishment?

Deceleration narrative. Azure growth has been slowing for three consecutive quarters. Capex is ballooning ($37.5 billion quarterly run rate). Margins are compressing. And 45% of the backlog depends on whether OpenAI can actually afford to pay its bills.

That’s a lot of uncertainty for a $3.4 trillion market cap.

What’s the valuation look like?

At $450 and $14.97 trailing EPS, the P/E is about 30x. Not outrageous for Microsoft, but it isn’t cheap either. The market wants to see AI acceleration, not deceleration. Is the pessimism finally priced into Microsoft? It certainly looks that way. While MSFT has historically commanded a 35x P/E ratio, it is currently trading at a more modest 30x. From a valuation standpoint, this creates a compelling entry point. Even if you look past our $660 target, the Street’s average estimate of $620 still suggests a massive 35% upside from here.

Is this a buying opportunity or a red flag?

Depends whether you believe Azure growth re-accelerates and margins expand in 2026. If capex spending generates revenue returns, Microsoft is fine. If they’re just subsidizing OpenAI’s burn rate while margins compress, the stock goes lower. From a risk-reward perspective, the current valuation seems like a good buying opportunity, in our view.

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