The Math Behind Microsoft's AI Boom Doesn't Add Up--And Investors Are Finally Noticing

Core Viewpoint - Microsoft is heavily reliant on OpenAI, facing challenges in selling its own AI products, which raises concerns about its future growth potential [1][5]. Group 1: Financial Performance and Dependencies - Microsoft's remaining performance obligation is $625 billion, with $281 billion tied to contracts with OpenAI, indicating a significant dependency on a single partner [2]. - The company spent $37.5 billion on capital expenditures in the last quarter, with two-thirds allocated to short-lived assets like GPUs and CPUs, raising questions about the sustainability of this investment strategy [3]. - Microsoft's free cash flow has declined due to soaring capital expenditures, leading to skepticism among investors regarding the returns on these investments [10]. Group 2: AI Product Adoption - Microsoft 365 Copilot, integrated into productivity apps, has only 15 million paid seats out of 450 million total, resulting in a penetration rate of just over 3%, suggesting weak commercial adoption [6]. - GitHub Copilot has 4.7 million paid subscribers, reflecting a 75% year-over-year increase, but still represents a small fraction of GitHub's 150 million users, indicating limited market penetration [7]. - The difficulties Microsoft faces in getting customers to pay for AI products may signal broader challenges for the AI industry, as spending on AI infrastructure may be outpacing real-world adoption [8]. Group 3: Market Position and Valuation - Microsoft stock trades at approximately 25 times the average analyst estimate for fiscal 2026 earnings, with the valuation heavily dependent on the outcomes of its deals with OpenAI [11]. - Despite challenges in the AI sector, Microsoft maintains strong software franchises and a dominant position in the PC market with Windows and Office productivity apps [9].