Nearly half of Microsoft's commercial contract backlog is tied to OpenAI

Microsoft is spending billions on AI, but investors still can't see clear returns. The stock is down by double digits.

Microsoft beat analyst expectations in its latest quarterly results for FY26 Q2. The company crossed $50 billion in quarterly cloud revenue for the first time, up 26 percent. That makes its AI business bigger than some core products the company has sold for decades, Microsoft says.

Still, the stock is down by double digits. Investors are skeptical about whether the massive spending on AI computing power is paying off. Microsoft spent $37.5 billion on infrastructure during the quarter, with two-thirds going to GPUs and CPUs. Meanwhile, cloud gross margin is sliding to 67 percent, with next quarter's forecast at 65 percent. Azure growth projections also fell from the current 39 percent to between 37 and 38 percent.

The signal to investors: Microsoft is spending record amounts on infrastructure while growth slows and margins shrink. The company points out that most GPU purchases are already contracted for their entire useful life.

CFO Amy Hood says Azure could grow faster if more capacity were available. Microsoft says it is rationing its scarce GPU resources strategically: first its own products like M365 Copilot and GitHub Copilot, then internal R&D teams, and only then Azure customers.

Microsoft said 365 Copilot seat adds were up over 160 percent year-over-year and the number of customers with over 35,000 licenses tripled, while average conversations per user doubled. Microsoft 365 Copilot now has 15 million paying users, it claims. But these numbers don't reveal whether the product is successful relative to the investment. For comparison, ChatGPT has 800 million weekly users.

OpenAI accounts for nearly half of Microsoft's commercial backlog

There is another detail that concerns investors: 45 percent of Microsoft's $625 billion commercial order backlog comes from a single customer, OpenAI. Large contracts from OpenAI and Anthropic alone drove booking growth to 230 percent. This does little to counter the narrative that the AI industry is inflated by circular business between cloud providers and AI model startups.

When asked about this relationship, CFO Hood shifted focus. She pointed out that 55 percent of the backlog, roughly $350 billion, comes from a broad portfolio of customers, solutions, Azure services, industries, and regions, and that portion alone grew 28 percent.

On the OpenAI partnership itself, Hood remained vague: it's a "great partnership," Microsoft remains the provider for scaling, and the company is proud of it. "We sit under one of the most successful businesses built, and we continue to feel quite good about that," Hood said.