Microsoft’s Cloud & The Quest for Everlasting Dividends

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Last year, with the optimism of a freshly-minted alchemist, I posited that Microsoft – that vast, sprawling principality of software and, increasingly, artificial intelligence – would scale new heights. It did, briefly. A peak, shimmering like fool’s gold, before tumbling back down the slopes of investor expectation. The stock, currently hovering around a rather uncomfortable eight-month low, has experienced a dip of some 10.5% since the last earnings report. A disconcerting wobble for those of us who consider Microsoft a cornerstone of the dividend portfolio. One doesn’t build a fortress on shifting sands, you see, and a reliable yield is rather like a sturdy gatehouse.

The question, then, isn’t simply can Microsoft recover, but when will it rediscover its upward trajectory? And, more importantly for those of us concerned with the steady accumulation of wealth (and the avoidance of grumpy accountants), will it continue to reward shareholders with a dividend that reflects its considerable power? Let us delve, then, into the curious case of the cloud, the insatiable appetite for silicon, and the unsettling notion that even software isn’t immune to disruption.

AI Spending: A Dragon’s Hoard of Capital Expenditures

Microsoft’s cloud business, a veritable engine of revenue, continues to boom, pulling in over $50 billion in the last quarter. Total revenue soared a respectable 17%, operating income by 21%, and adjusted earnings per share jumped a rather pleasing 24%. A truly impressive quarter, one might think. And yet… a shadow hangs over these figures. Investors, it seems, are concerned about the cost of feeding the AI beast.

The company has embarked on a spending spree of truly epic proportions, a mind-numbing $37.5 billion in capital expenditures last quarter alone. Two-thirds of that went towards short-lived assets – graphics processing units and central processing units, the very building blocks of digital sentience. For context, just four years ago, Microsoft’s annual capex was a mere $28.1 billion. It’s as if the company is building a dragon’s hoard of silicon, hoping to attract a digital wyrm.1

Much of this expenditure is directed towards the development of Maia 200, Microsoft’s own custom AI chip. “At the silicon layer,” proclaimed CEO Satya Nadella, “we have Nvidia, AMD, and our own Maia chips delivering the best all-up fleet performance, cost, and supply.” A bold claim, and one that suggests a rather determined effort to wrestle control of the AI supply chain. They’ve added a gigawatt of data center capacity, and plan to scale Maia for AI workloads. Costly, certainly. But Microsoft justifies it by claiming demand continues to outpace supply. A situation reminiscent of the great goblin market, where rare and valuable commodities are always in short supply.2

The Software Slowdown: When Algorithms Threaten the Kingdom

Microsoft’s AI growth is, shall we say, heavily reliant on OpenAI. Forty-five percent of Microsoft’s $625 billion in remaining performance obligations is tied to that particular entity. Winning orders from OpenAI was once seen as a cause for celebration. Now, some investors are questioning whether OpenAI can raise enough money to fulfill its insatiable appetite for AI infrastructure. They plan to build 10 gigawatts of data centers, a truly ambitious undertaking.

Oracle, a cautionary tale, has fallen 47% from its all-time high, partly due to its dependence on OpenAI to fulfill its cloud bookings. For Microsoft’s AI spending to pay off, OpenAI needs to either raise a substantial amount of capital or dramatically grow its revenue. A precarious situation, reminiscent of a knight relying on a particularly unreliable steed.3

To add to the complexity, Microsoft is, after all, the world’s largest software company. And software stocks, even as the broader tech sector reaches new heights, are currently experiencing a bit of a… wobble. The fear, it seems, is that AI will continue to disrupt enterprise software, rendering traditional applications obsolete.

Microsoft, however, isn’t sitting idly by. Nadella, during the earnings call, offered this insightful observation: “Like in every platform shift, all software is being rewritten. A new app platform is being born. You can think of agents as the new apps.” He envisions a future where AI agents, rather than traditional applications, will dominate the software landscape. Microsoft, he claims, has the broadest selection of models, supporting OpenAI’s ChatGPT and Anthropic’s Claude. They’re building an enterprise-scale AI platform, Foundry, allowing customers to utilize both models. A rather cunning move, positioning themselves as the neutral ground in the coming AI wars.

A Compelling Value, But Patience is a Virtue

The recent sell-off in Microsoft presents a rather impeccable buying opportunity for long-term investors. The company’s spending is something to monitor, as it could weigh on profit margins. But the bulk of that spending is directed towards AI infrastructure, which Microsoft can always scale back if demand slows. A comforting thought for those of us who prefer a steady stream of dividends to speculative gambles.

At a reasonable 29.1 times forward earnings, Microsoft stands out as a top buy. However, expect the stock to remain under pressure until Microsoft begins converting its commercial backlog into realized revenue. Patience, my friends, is a virtue. And a reliable dividend is worth waiting for. After all, a kingdom isn’t built in a day, and neither is a robust dividend portfolio.

1

Dragons, as any self-respecting accountant will tell you, have a peculiar fondness for shiny objects. Silicon, in this context, serves as a perfectly acceptable substitute for gold.

2

The goblin market, notoriously unpredictable, is best avoided unless one is prepared to barter with one’s soul.

3

A reliable steed, preferably one with a strong constitution and a complete lack of magical tendencies, is essential for any knight worth his salt.

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2026-02-03 01:24