Microsoft’s Contracted Backlog Could Grow Into a $1 Trillion Opportunity
Customers are signing contracts with Microsoft faster than the company can build data centers to serve them, and the backlog number that results may be the most important figure most investors have never looked at.
I keep a close eye on Microsoft (NASDAQ:MSFT | MSFT Price Prediction), and every earnings report gives me another reason to study it. What keeps pulling me back is simple. Customers have signed contracts promising Microsoft hundreds of billions of dollars in future revenue, and that pile is growing faster than the business itself.
A $678 Billion Backlog Investors Can’t Ignore
Commercial remaining performance obligations are Microsoft’s contracted backlog. They rose 84% to $678 billion in fiscal Q4 2026. Three quarters earlier, the figure stood at $392 billion. It then rose to $625 billion and $627 billion before the latest jump. Skeptics point to OpenAI. On the July call, Amy Hood said all sequential RPO growth came from customers outside frontier model companies. About 30% of the backlog converts to revenue within 12 months. That kind of visibility gives long-term investors a cleaner view of future revenue. Some analysts believe that RPO figure could grow to $1 trillion, giving bullish investors reason to pile into Microsft in anticipation of that bump.
Azure and Copilot Turn Contracts Into Cash
Azure exceeded $100 billion in full-year revenue for the first time, and Azure and other cloud services grew 43% in the fourth quarter. As of Q3, the AI business ran at a $37 billion annualized pace, up 123%. Microsoft 365 Copilot passed 30 million paid seats. Hood also confirmed supply remains the constraint: “demand continues to exceed available supply. And that certainly remains true.”
A Profit Engine That Funds Itself
Fiscal 2026 revenue reached $331.84 billion, up 17.79%, while operating cash flow rose 34.35% to $182.94 billion. Microsoft runs a 46.78% operating margin and a 22.01% return on invested capital, with interest coverage of 50.88x. It has beaten EPS estimates for six straight quarters and returned more than $43 billion to shareholders in fiscal 2026. Over the past year the stock moved just 0.79%, even as the backlog soared. That gap between share performance and backlog growth is worth researching.
How Microsoft Stacks Up Against Amazon and Alphabet
Amazon (NASDAQ:AMZN) owns AWS, which grew 37% last quarter. Still, Amazon trades at 35x earnings against Microsoft’s 30x. It pays no dividend, and its trailing free cash flow fell to -$7.6 billion.
Alphabet (NASDAQ:GOOGL) looks cheaper at 14x earnings. A $99.03 billion gain on equity securities inflated its Q2 net income, though. Free cash flow came in at -$5.86 billion, long-term debt rose from $46.5 billion to $98.2 billion, and Alphabet suspended buybacks. Microsoft also yields more: 0.67% versus 0.53%.
Capex Risk I Refuse to Ignore
The real threat is spending. Fiscal 2026 capex reached $115.95 billion, and fourth-quarter free cash flow fell 23.19% to $19.64 billion. July guidance, possibly updated this week, put fiscal 2027 capex near $175 billion. Excluding OpenAI, RPO grew only 25%. Returns contract once AI demand cools off.
My thesis remains intact because about two-thirds of capex goes to short-lived CPUs and GPUs. Management can slow those purchases quickly, and it expects to stay free cash flow positive in fiscal 2027.
What Could Move Microsoft Next
Microsoft reports again this week. I will look for backlog growth outside OpenAI, new Copilot seats, and free cash flow that holds up under greater spending. As long as customers keep signing multi-year contracts faster than Microsoft can build data centers, I will keep an eye on the stock.
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Alex Sirois is a financial writer with experience spanning both retail and institutional investing. He has written for InvestorPlace and held roles at BNY Mellon and Bernstein, giving him a perspective that bridges Main Street portfolios and Wall Street analysis.
Alex holds an MBA from George Washington University and has built his career across multiple industries, including e-commerce, education, and translation — a breadth of experience that informs how he breaks down complex financial topics for everyday investors. His writing is conversational, actionable, and grounded in long-term, buy-and-hold investing principles.
At 247 Wall St., Alex focuses on delivering analysis that is both accessible and useful, with a clear emphasis on helping readers make more informed decisions with their money.
