Nathaniel Whittemore

Azure is also a much larger division than it was a year ago, making hypergrowth more difficult to maintain.

Still, we are in the middle of an AI infrastructure boom, and to some it seems like Microsoft is failing to take part to the fullest extent.

Caution has come to define Microsoft's strategy over the past year.

Last February, for example, there was a massive news cycle around Microsoft canceling numerous data center projects.

CFO Amy Hood insisted that this was largely about forecasted softness and demand, and Microsoft didn't want to be left holding useless data centers if demand dropped off given the long lead times to complete construction and power up GPUs.

Compare that sort of framing to Zuckerberg, who has basically relentlessly said that the risk of overspending by hundreds of billions on infrastructure is dramatically less than the risk of underspending.

In any case, when it comes to Microsoft, they're now faced with a different problem.

They disclosed that their cloud sales backlog has more than doubled from a year ago to reach 625 billion.

Much of that growth came from a new $250 billion commitment from OpenAI.

In total, OpenAI now accounts for 45% of Microsoft's backlog.

And so whereas Meta's stock jumped 8% overnight, Microsoft's stock fell by about 5% in after-hours trading.

And indeed, going back to the theme of this episode, Bloomberg suggested this was fears of the AI bubble popping manifesting in the market.

Yet to me, that doesn't really carry water.

It seems more like Microsoft is being punished for failing to grow as fast as possible during this boom period.

They have over a trillion dollars worth of sales waiting in their backlog and slowing cloud growth.

Rather than powering up GPUs then, Microsoft chose to miss out on sales.

To the extent that there are bubble fears, they're almost entirely about OpenAI's ability to make good on their commitments.

Jefferies analyst Brent Thill said, The backlog is really good, but the disclosure that OpenAI is 45% of their backlog, it goes back to the situation where, can OpenAI achieve these financial goals to pay Oracle, Microsoft, and many of the providers?

Now, Microsoft does appear to be correcting their underbuilding issue, if ever so slightly.

CapEx for the quarter came in at $37.5 billion, up 66% from a year ago and slightly above analyst expectations.