Microsoft holds near key support as investors assess strength of AI demand

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Microsoft holds near key support as investors assess strength of AI demand

Capacity constraints become a key execution risk

A more interesting factor now is not the size of AI investment itself, but how flexibly Microsoft will be able to manage the capacity it has built. Bernstein points out that AI still accounts for only around 17% of Microsoft Commercial Cloud, meaning that most of the cloud business continues to grow through traditional Azure workloads, Microsoft 365, and enterprise services.

At the same time, the company’s future lease obligations increased to $329.1 billion, while AI infrastructure commitments for fiscal 2027 are estimated at around $169 billion, but are then expected to decline significantly. This reduces the risk that Microsoft will become fully dependent on a single generative AI monetization scenario. This is also why Bernstein recently raised its target to $660, while Wells Fargo raised its target to $700, although the average consensus remains significantly below these most optimistic estimates.

Demand still runs ahead of available computing power

A separate risk is that demand continues to exceed physically available computing capacity. Microsoft had previously warned that Azure would remain capacity-constrained despite the accelerated rollout of data centers, GPUs, CPUs, and storage. This is an unusual situation: supply constraints simultaneously prevent the company from recognizing revenue more quickly, but also confirm that the problem is not a lack of customers.

The next test for investors will be Microsoft’s ability to expand available capacity without a noticeable deterioration in free cash flow and margins. Against this backdrop, Nvidia’s results this week are also important for MSFT, as they could change the market’s view of the entire AI capex cycle and demand for accelerators.

Lower Treasury yields provide some relief

The Treasury market is providing Microsoft with a moderately positive external backdrop today. The 10-year yield fell to around 4.66-4.68% in the morning, while the 30-year yield declined to about 5.21% amid falling oil prices and some easing in inflation concerns. This supports MSFT through a lower discount rate, although yields remain historically high and the market continues to account for the enormous volume of government debt issuance and debt financing of AI infrastructure by technology companies themselves.

In addition, expanded purchases of long-dated Treasuries by the U.S. Treasury have so far had only a limited effect on the long-term cost of capital. Therefore, as long as MSFT holds above $482-480, the possibility of a continued recovery toward $492-500 remains. A sustained move above $500, as I warned in Microsoft remains fundamentally strong as yields pressure AI valuations, would significantly improve the short-term technical picture, while a loss of $480 would once again increase the risk of a return toward $470-465.

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