At first glance, Microsoft's (MSFT +0.66%) fiscal third-quarter results look strong. Revenue rose 18% year over year to about $83 billion. And operating income surged 20% year over year, or 16% in constant currency.
So why did the stock fall about 5% the next day -- and why is it still down about 14% year to date with shares around $413 as of this writing?
A closer look reveals one element I think may be weighing on the stock. Two of the cloud computing and AI giant's most-watched growth indicators -- the commercial backlog and the headline Azure growth rate -- failed to impress in fiscal Q3. Indeed, you could argue that they are showing signs of stalling. And that's a problem, given how much management is now committing to spend.
Image source: Getty Images.
A backlog that hardly moved (sequentially)
Microsoft's commercial remaining performance obligations (RPOs), or the dollar value of contracted commercial work that has not yet been recognized as revenue, came in at $627 billion in the fiscal third quarter. That figure is up 99% from a year earlier -- a number that, on the surface, looks remarkable.
But the sequential picture is much less impressive. Just three months earlier, in fiscal Q2, Microsoft's commercial backlog stood at $625 billion. So, the gain over the most recent quarter was only about $2 billion -- coming after an eye-opening $233 billion sequential increase the prior quarter, when the figure jumped from $392 billion in fiscal Q1.
Even more telling, Microsoft disclosed that excluding contributions from OpenAI, the creator of ChatGPT, its commercial RPO grew 26% year over year. That's a more grounded pace, and it arguably reflects the underlying business better than the massive headline figure.
In other words, the recent surge in Microsoft's backlog seems to have leaned heavily on a single, very large customer commitment rather than broad-based demand. And once the OpenAI contribution laps into year-over-year comparisons, even the year-over-year growth rate could slow substantially.
The company also disclosed that commercial bookings, excluding the impact from OpenAI, rose just 7%.
NASDAQ: MSFT
Key Data Points
Azure's growth rate barely budged -- and the price tag keeps rising
The other reason for caution is Microsoft's growth in "Azure and other cloud services," which essentially comprises the software giant's cloud computing business.
Azure and other cloud services revenue rose 40% year over year in fiscal Q3, or 39% in constant currency. That did beat management's own 37% to 38% guidance, and it ticked up by one point versus the 38% in constant currency reported in fiscal Q2.
But step back. Microsoft also grew Azure 39% in constant currency in its fiscal first quarter. Across three quarters, then, the constant-currency trend line is essentially flat -- not the kind of acceleration investors might hope to see given how aggressively the company is investing in capacity.
And those investments keep climbing. On the earnings call, Hood pointed to capital expenditures of more than $40 billion in the upcoming fiscal fourth quarter -- and roughly $190 billion in capital expenditures for calendar 2026. That's up about 61% from 2025, and well ahead of the roughly $155 billion analyst consensus heading into the print.
The early effects of an investment cycle like this on cash flow are already visible. Free cash flow in fiscal Q3 fell about 22% year over year to $15.8 billion as capital expenditures and finance leases climbed roughly 49% to $31.9 billion.
For a stock trading at a price-to-earnings ratio of about 25 as of this writing, none of this is necessarily a deal-breaker. There's still a credible argument that the AI build-out pays off in time. But the combination of a backlog that has gone flat sequentially and a step-up in spending that could keep pressuring free cash flow has me approaching the stock cautiously.
