Microsoft’s Rocky Start to 2026
The year 2026 hasn’t been kind to Microsoft. The company’s stock has seen a sharp decline—around 18% down since January. In fact, it’s dropped about 29% from its 52-week peak of $555.45.
This downturn in tech stocks isn’t just a Microsoft issue. Many investors are increasingly cautious due to the shifting risks in the tech landscape, particularly regarding artificial intelligence.
I initially thought this backlash could present an opportunity. Microsoft’s core business remains robust, after all. In the last quarter, their revenue rose by 17% compared to last year, and operating income jumped 21% to $38.3 billion. But thinking it over—after diving deeper into the competitive landscape and examining their recent earnings—I’m feeling less optimistic. The risk of continued valuation compression seems more significant than I’d anticipated. Yes, AI is a factor, but I’m more concerned about the potential for Microsoft’s business to be challenged from multiple angles in the years to come.
About that Backlog
On the surface, the demand for Microsoft’s AI-driven cloud services seems almost unstoppable.
The company reported a staggering 110% year-over-year increase in its commercial remaining performance obligations (RPO), reaching $625 billion during the last fiscal quarter. This figure essentially represents contracted commercial work that hasn’t been realized as revenue yet—an important demand indicator.
However, that impressive number conceals some substantial risks.
Firstly, about 45% of Microsoft’s commercial backlog comes from a single customer: OpenAI. If you take OpenAI out of the equation, the growth in Microsoft’s commercial RPO drops to just 28% year-over-year.
Secondly, it’ll take a considerable amount of time for this backlog to translate into actual revenue. Microsoft estimates that only 25% of these total RPOs will be recognized in the next year.
Moreover, despite the growing backlog, revenue from Microsoft’s “Azure and other cloud services” actually slowed during the last fiscal quarter, rising 38% year-over-year (adjusted for currency), compared to 39% growth in the previous quarter.
This slowdown coincides with soaring capital expenditures—Microsoft spent $37.5 billion in its last fiscal year, a staggering 66% increase from the previous year. While the company invests heavily to support this backlog, relying so much on a single partner for future revenue is a precarious scenario for investors.
Competition and Evolving Market Dynamics
Looking beyond the backlog, Microsoft is facing mounting pressure from other major players in the tech sector.
Amazon remains a powerful force in cloud computing, with its Amazon Web Services (AWS) division gaining traction. AWS revenue grew by 24% year-over-year in the last quarter, reaching $35.6 billion, an increase from 20% growth in the previous quarter.
Meanwhile, Alphabet’s Google Cloud is even accelerating faster than Microsoft, with its fourth-quarter revenue soaring by 48% year-over-year.
There’s also the long-term threat posed by demographic changes in the enterprise sector. Microsoft has historically relied on established enterprise applications, but what happens when younger executives, familiar with Google services, start making the key decisions? Google already holds a significant lead in search and in its productivity tools like Google Docs, Sheets, and Slides. Plus, Google’s generative AI, Gemini, is gaining traction.
Revising Perspectives on Microsoft Stock
With a price-to-earnings ratio hovering around 25, Microsoft’s valuation might not seem overly high at first glance.
However, regardless of this seemingly favorable valuation, the company needs to stay competitive and effectively leverage its considerable AI investments to maintain healthy profit margins in its software segment.
If Microsoft loses ground to Alphabet in the enterprise market, or if reliance on OpenAI-related contracts hampers profits, the stock could see a sharp decline in valuation.
There’s no denying that Microsoft is a fundamentally strong business, but the tech landscape is shifting swiftly. As major firms ramp up their spending, Microsoft risks losing its edge and, consequently, its pricing power.
As for my updated view on the stock—I’m advising against buying the dip. If prices fall to a price-to-earnings ratio of around 18 to 20, I might reconsider my stance.
