Checking in on Microsoft as Capex Concerns Pummel Stock

Similar to ServiceNow (NOW) , Microsoft (MSFT) delivered an upside surprise for its December quarter, but also like NOW shares, MSFT shares are being pummeled on Thursday.

The culprit behind that, however, is a different one than what's behind the NOW pressure, and it can be traced back to the market being underwhelmed by Microsoft monetizing capex spending in recent quarters.

Granted, Microsoft’s commercial remaining performance obligation (RPOs) increased to $625 billion, up more than 100% year over year and significantly compared to $392 billion at the end of September. But that should not be a surprise, given the December quarter commitments from OpenAI for $250 billion to Azure.

What that tells us is Microsoft has a good runway ahead of it, but it is monetizing those obligations at a slower rate, and ahead it faces difficult year-over-year comparisons. We’ve talked with you about this with regard to Costco (COST) lapping strong comp sales, and yet it continues to deliver impressive comp sales figures on top of them. In the December quarter, Microsoft’s Azure business posted 39% revenue growth, better than the 37% management guided to, but it also sees that growth rate “cooling” to 37% to 38% in the March quarter.

Technically speaking, the March 2026 revenue growth guidance of 37.5% is slower than the 39% posted in the December quarter, but as we’ve seen before, context is everything. Two things should add some much-needed perspective. First, for the March quarter, the consensus revenue growth forecast was 36.4%, which means at the midpoint of Microsoft’s guidance, it’s a full percentage point better than expected. Second, that 37% to 38% compared to the 33% increase in revenue posted during the March 2025 quarter.

Microsoft can share several positive data points, like Microsoft Cloud passing $50 billion in revenue for the first time, daily users of the Copilot app increased 3x year over year, over 1,500 customers using both Anthropic and OpenAI models, and the December quarter being a record quarter for Microsoft 365 Copilot seat adds, up over 160% year-over-year. Exiting the December quarter, the company had 15 million paid Microsoft 365 Copilot seats, and “multiples more enterprise Chat users.” Cash flow from operations was $35.8 billion, up 60%, driven by strong cloud billings and collections, and free cash flow was $5.9 billion

So, what’s the issue?

Pretty much the same one from the last two quarters: customer demand continues to outstrip supply, and that continues to restrain Microsoft from monetizing its RPOs at a quicker pace. The “problem” is we’ve heard this before, and the timetable for it being remedied is further down the road.

So long as the RPOs continue to climb, signaling Microsoft is continuing to win its share of cloud as enterprise AI adoption continues, we see it as not the worst problem to have. It could be far worse, and for that, we only have to look over at SAP SE’s (SAP) shares and the cloud backlog miss it delivered.

There were some bumps in Microsoft’s guidance, including the expected low-teens decline for its Windows OEM and hardware business, but as we discussed a long time ago, with about 77% of Microsoft’s gross profit dollars coming from the Services and Other segment, it is not a hardware company.

What the market is waiting for is for Microsoft to put enough capacity in place to effectively monetize the business it has been booking. We are also in that camp. The reality is it may take longer than the market expects, especially if AI adoption and usage in the enterprise accelerates as some third-party forecasts call for. The silver lining for us is that addressing that constraint bodes well for our positions in Marvell (MRVL) and Broadcom (AVGO) .

But with MSFT shares now back at levels we haven’t seen since May, and with its RPOs more than $300 billion higher compared to the $315 billion at the end of March, as painful as it may be, the prudent course is hold to the course. While this may feel like the worst, when we look at those RPO gains and growing AI adoption, let’s remember that sometimes you have to get through the worst to get to the best.

That said, we will make the same comments we did with ServiceNow shares. First, with MSFT shares entering oversold, now is not the time for any folks who are not inclined to stay the course to give up on them. That condition also means we will not employ our $450 panic point, especially given the dramatic increase in RPOs.

Second, we will continue to track Microsoft’s RPOs, and if we see warning signs, that will be a signal for us. Elevated capex levels and losing business are not a place to be. Fortunately, that’s not the picture we see.

And that brings us to our third point. Subject to cash levels, where MSFT shares settle out and other opportunities in front of us, we will consider picking up some additional shares for the Portfolio.

In terms of our price target, unlike many others in Q4 2025, we did not boost ours, which means the reductions we are seeing from Wall Street to $575to $635 bookend our $600 target.

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At the time of publication, TheStreet Pro Portfolio was long NOW, MSFT, COST, MRVL and AVGO.