Microsoft Stock Soars: Is Now the Time to Invest?

Microsoft recently announced its fiscal second-quarter results, revealing a significant increase in its commercial backlog. The company’s commercial remaining performance obligations (RPOs) surged to $625 billion, more than doubling year-over-year and reflecting a strong demand for its AI-driven cloud services.

Microsoft’s Remarkable Backlog Growth

The rise in Microsoft’s commercial RPOs highlights the growing appetite for AI-capable computing solutions. In the fiscal second quarter, RPOs experienced an increase of 110% compared to the same period last year. This is a marked acceleration from the 51% growth seen in the previous quarter.

Key Financial Figures

• Current Market Cap: $3.2 trillion
• Current Share Price: $433.50
• Day’s Range: $421.02 – $442.50
• 52-Week Range: $344.79 – $555.45
• Volume: 129 million shares
• Gross Margin: 68.59%
• Dividend Yield: 0.78%

While the growth of the backlog may seem promising, there are important considerations for potential investors.

Factors for Caution

• Contracted Work: The RPOs reflect contracted work rather than guaranteed revenue. Actual revenue realization may take considerable time.
• Customer Concentration: A significant portion—45%—of the backlog is attributed to OpenAI, introducing customer risk.
• Deceleration in Cloud Revenue: Despite an increasing backlog, Microsoft’s cloud division, Azure, reported a slight deceleration in growth rates.
• Increased Spending: Microsoft has ramped up capital expenditures, reaching $37.5 billion in the latest quarter, a 66% increase year-over-year.

Investors should evaluate Microsoft based on its current financial performance rather than the growth in its backlog alone. In fiscal Q2, revenue increased by 17% year-over-year, with earnings per share climbing 24% during the same period. Given its price-to-earnings ratio of around 27, Microsoft stock appears attractive at present.

Conclusion

While Microsoft’s soaring backlog suggests robust demand for AI-driven solutions, potential investors should approach this growth cautiously. The ongoing high capital expenditures coupled with uncertain revenue conversion timelines may affect the company’s profitability. As a result, keeping any investment in Microsoft within a manageable size is advisable.