Microsoft's Swelling Backlog: Why This RPO Surge May Not Signal Strong Growth

Microsoft’s fiscal second-quarter earnings revealed a striking figure: the company’s commercial remaining performance obligations (commonly referred to as backlog or contracted pipeline) nearly doubled to $625 billion year-over-year. On the surface, this dramatic expansion might suggest explosive revenue growth ahead. However, investors should dig deeper before assuming the backlog’s impressive scale will translate into near-term profits. Understanding what this mounting pipeline actually represents—and what it doesn’t—is critical to making an informed investment decision on the software and cloud giant.

Understanding the Backlog Boom

A company’s backlog represents contracted work that hasn’t yet been converted into recognized revenue. For Microsoft, this figure has become an increasingly important metric to watch, particularly as demand for cloud computing and artificial intelligence services accelerates. The company’s backlog surged 110% in fiscal Q2 compared to the prior year, more than double the 51% growth rate it posted in fiscal Q1. This acceleration might seem like cause for celebration, but context matters enormously.

The primary driver behind this expanded pipeline is Microsoft’s heavy investment in AI infrastructure and cloud capacity. OpenAI’s insatiable appetite for computing resources has played a starring role. In fact, OpenAI accounts for roughly 45% of Microsoft’s entire commercial backlog—a concentration so significant it warrants serious investor scrutiny. When you exclude OpenAI from the calculation, Microsoft’s backlog growth drops to just 28% year-over-year, telling a very different story about demand across the company’s broader customer base.

Revenue Recognition: When Will the Backlog Convert?

Here’s where the narrative becomes more complicated. A swollen backlog doesn’t automatically mean surging near-term revenues. Microsoft itself provided evidence of this disconnect in its fiscal Q2update. While the company’s total commercial backlog grew 110%, the portion it expects to recognize as revenue over the next 12 months rose only 39%—less than half the backlog’s expansion rate. Even more telling: just 25% of Microsoft’s total backlog is projected to be converted into recognized revenue within the next year.

This reality highlights a fundamental characteristic of backlog-driven growth: multiyear contracts and extended implementation timelines mean that mountains of future revenue often translate into trickles of current income. Microsoft’s Azure and other cloud services segment actually decelerated its growth trajectory in fiscal Q2, posting 38% year-over-year expansion in constant currency compared to 39% in the prior quarter. A growing backlog amid slowing current revenue growth creates an uncomfortable paradox for investors betting on immediate acceleration.

The Hidden Risks in This Expanding Pipeline

The concentration risk posed by OpenAI’s dominance cannot be overstated. While major contracts from high-value customers are excellent for business stability, the reality that nearly half the backlog depends on a single customer introduces fragility. Changes in OpenAI’s computing requirements, a shift in their strategic priorities, or even disputes over terms could dramatically reshape Microsoft’s outlook. This customer concentration risk becomes even more acute when you recognize that non-OpenAI backlog growth significantly lags behind the headline number.

Capital expenditures add another layer of complexity. Microsoft deployed $37.5 billion in capital spending during fiscal Q2, representing a stunning 66% year-over-year increase. The company is essentially racing to build out sufficient cloud infrastructure to eventually fulfill its backlog commitments. While this investment should theoretically enable better revenue conversion rates down the line, there’s no guarantee. The bull case assumes these infrastructure investments will eventually drive highly profitable revenue streams. The bear case suggests that converting the backlog might prove slower and less profitable than anticipated, potentially pressuring margins as the company invests heavily while still capturing revenue gradually.

Is Microsoft Stock Attractive Despite the Backlog?

Setting aside the backlog storyline, Microsoft’s recent financial performance has been respectable. The company grew revenue 17% year-over-year in fiscal Q2, with non-GAAP earnings per share climbing 24%—solid metrics for a mature tech giant. Trading at roughly a 27 price-to-earnings multiple, the stock appears reasonably valued on current results alone.

The core investment question isn’t whether the backlog represents real demand—it clearly does. Rather, the question is whether that backlog will convert into revenues and profits at the rate Microsoft and investors expect. The gap between backlog growth and near-term revenue recognition, combined with the outsized OpenAI dependency and surging capital requirements, creates meaningful uncertainty. Investors should view Microsoft as a higher-risk holding until clearer evidence emerges that this backlog inflection will accelerate actual profitability rather than just future potential. For now, the company’s current valuation seems justified by recent results—but the massive spending commitments required to fulfill this backlog demand investors maintain appropriately cautious positions.