MSFT down 23% in 6 months. I found some uncommon risks.
u/Annual_Carpenter_548 ·
Reddit — r/ValueInvesting
· February 24, 2026 at 22:02
· ⬆ 227 pts
· 💬 123 comments
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Summary
The post analyzes Microsoft's recent 30% stock price decline despite a record-breaking earnings report, arguing that the market is pricing in several under-the-radar risks.
The author's thesis is that Microsoft's valuation is inflated due to a highly concentrated revenue backlog (45% from OpenAI), poor conversion rates for its key AI product (Copilot), and the existential threat of AI commoditizing its core software products.
Quality assessment: This is well-researched DD. The author provides specific data points (backlog concentration, Copilot conversion rates) and a logical, albeit contrarian, argument to support their thesis.
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Microsoft hit $555 in late October 2025. It's around $388 today. Down about 30%. The company just reported its best quarter ever on almost every metric, revenue up 17% to $81.3 billion, adjusted earnings per share up 24% to $4.14, operating margin at 47%, cloud revenue crossing $50 billion in a single quarter for the first time. And the stock dropped 10% in one day.
So what's going on? Here's what I found.
# The number worth looking at closely: 45% of the backlog is for one customer
Microsoft reported $625 billion in remaining performance obligations, which is contracted future revenue. That number was up 110% year over year and it sounds incredible. But here's the thing: roughly 45% of that, about $281 billion, comes from OpenAI.
That's not a diversified backlog. That's a single customer who has never turned an annual profit, burns cash at an extraordinary rate, relies on continuous fundraising rounds, is building its own custom chips with Broadcom (starting late 2026), and just signed a $38 billion deal with AWS. OpenAI has made about $1.4 trillion in total commitments to energy and compute providers. Their revenue barely crossed $20 billion in 2025. Strip out OpenAI from Microsoft's backlog, and the remaining $344 billion grew 28%. That's solid, but it's not the 110% headline everyone quotes.
# Copilot has a 3.3% conversion problem
15 million paid seats out of 450 million commercial M365 seats. And it's getting worse. Copilot's paid subscriber share dropped from 18.8% to 11.5% between July 2025 and January 2026, while ChatGPT and Gemini gained. Microsoft is charging $30/user/month for a product that most people with free access don't convert on.
# AI is coming for Microsoft's own products
This is the one nobody talks about. Everyone frames MSFT as an AI winner. But AI tools from other companies are starting to replace the things people actually use Microsoft products for, writing docs, building spreadsheets, managing email. SemiAnalysis noted that "Claude for Excel effectively is what Copilot for Excel should have been." LinkedIn is getting flooded with AI content. GitHub faces Claude Code and Cursor. The irony: Microsoft is spending $120B/year to build AI while AI threatens to commoditize the software that funds it.
The remaining risks can be reviewed in [my full writeup on Substack, with all sources and accounting analysis.](https://sarvesh8757.substack.com/p/microsoft-cheap-or-cheap-for-a-reason)