This article is a continuation of our free newsletter from May 16, Microsoft Stock Surges After Q3 2025 Earnings: What Separates Azure from AWS, Google Cloud.
For our Premium Members, we discuss the following:
- Microsoft’s nearly 900M user AI catalyst for both enterprises and consumers
- The one key metric we are watching to help time when Microsoft’s stock will rally again after being flat for nearly a year
- The hidden clue in Microsoft’s earnings report that hints a new AI trend is about to start, and a few key beneficiaries of the explosive trend management is confirming is about to begin.
900M Users on Windows 10 Incentivized to Upgrade to Windows 11
While the Windows 10 end of life support is well-known by now, the reason that we believe it will be a catalyst for Microsoft is that the upgrade cycle will help Microsoft to force many enterprise users to adopt its AI features. Windows 11 devices (Copilot+ PCs) were designed with on-device AI in mind utilizing powerful NPUs, and enterprise use cases for AI require the enhanced security and compliance support no longer provided under Windows 10 after its sundown. The upgrade cycle will place integrated AI features and Copilot directly and instantly to enterprises and consumers, potentially driving higher consumption for 365 services, Copilot Pro, or tokens and API calls.
Microsoft will end Windows 10 support on October 14, 2025, though it is offering extended security update (ESU) licenses to allow for some extension and support past the deadline. Consumers have the ability to purchase a one-year license through October 2026 and enterprises up to 3 years through October 28; however, a lack of support means Windows 10 is likely to be mostly unusable especially for enterprises that require said security.
This is likely to force many upgrades to Windows 11 as license prices for enterprises double from $61 to $122 to $244 per device, quickly adding up each year; Microsoft says organizations have the option to enroll their PCs into a paid ESU subscription after support ends, with the ability to renew each year thereafter for an increasing price. This provides extra time for organizations to plan and commence upgrades, while encouraging them to do so sooner rather than later. Assuming 10 million enterprise devices choose to stay on Windows 10 for the full three year license, that would generate nearly $4.3 billion in license revenue.
Microsoft noted that they are seeing “increased commercial traction as we approach end of support for Windows 10,” and “Windows 11 commercial deployments increased nearly 75% year-over-year.” When it comes to AI-capable PCs, enterprise adoption is expected to drive growth, and this is where Windows 11 makes its mark with Copilot as default on the OS. Canalys says that “Windows AI-capable PC shipments grew 26% sequentially, accounting for 15% of all Windows PCs shipped” in the December quarter, with more enterprises expected to upgrade as the deadline nears.
Microsoft Sees Strong Bookings, RPO Growth
We wanted to point out for Premium members that while bookings are lumpy, Commercial RPO growth above 30% suggests that Microsoft’s stock could (finally) resume strength again.
The last time we saw RPO in the 30%+ growth range was in late 2022-mid 2023 correlating to stronger price action than what we saw in 2024, for example.
Pictured above: Microsoft’s stock rallied up to 68% during quarters when RPO was above 30%.
Microsoft has now reported two quarters with RPO above 30%. Per the most recent earnings call: “Commercial RPO increased to $315 billion, up 34% and 33% in CC. Roughly 40% will be recognized in revenue in the next 12 months, up 17% year-over-year. The remaining portion recognized beyond the next 12 months increased 47%.”
Commercial RPO recorded a second straight quarter with >33% YoY growth in Q3 .
It should also be pointed out that Microsoft’s RPO is monstrous at $315 billion. This is almost double the RPO the company saw in the 2022-2023 period in the mid-$100B range. Growth this high on such a large number should not be overlooked.
Furthermore, when Microsoft’s stock was flat in 2024, the company was reporting RPO growth in the 20% range. Not only is RPO up 15 points in the most recent quarter, but RPO had doubled in the prior quarter from 17.5% to 34% and 36% in constant currency.
Commercial RPO also helps to further separate Microsoft from its Big Tech peers, as its growth is quicker and at a larger scale than both AWS and GCP — Amazon noted that its backlog rose nearly 20% YoY to $189 billion, while Alphabet said GCP’s RPO rose nearly 28% YoY to $92.5 billion. This strong RPO growth at scale helps cement Azure’s leading growth profile through 2026, at an estimated >10 points faster than AWS this year and next and faster than GCP even on a larger revenue base.
What we want to see as investors is not only was the current earnings report strong, but we also want hints that growth can sustain. While bookings are lumpy, RPO is communicating that Microsoft has what it takes to lead the Mag 7 again.
Microsoft CEO Slips They are “Short Power” in Earnings Call
Perhaps one of the more peculiar points of Q3’s report was the fact that Microsoft’s capex declined sequentially despite management noting that they expect to be capacity constrained through at least the June quarter – this begs the question, why slow capex if there are capacity constraints?
Capex declined sequentially for the first time in 2 years, at $21.4 billion versus $22.6 billion in the prior quarter. Q3’s figure was also slightly lower than expected due to variability in timing of data center leases, though capex is expected to increase sequentially in fiscal Q4.
CEO Satya Nadella mentioned that Microsoft would be “short power” in the earnings call and then tried to walk it back later in what was kind of an awkward moment: “And that's what you see reflected, and I feel very, very good about the pace. In fact, Amy just mentioned, we will be short power. And so therefore — but it's not power, but it's not a blanket statement. I need power in specific places so that we can either lease or build at the pace at which we want.”
CFO Amy Hood also tried to clarify that “when Satya talks about being short power, he's really talking about data center space. And so we've continued through the second half to put things in place.”
Our takeaway: The CEO of Microsoft is one of the most knowledgeable and polished speakers on the planet. I do not think he said “short power” to mean data center space — although there is a correlation between higher data center density needing better power solutions and data center density – rather, he clearly stated Microsoft needs power “in specific places.”
We’ve been tracking this closely for over a year, starting with a thematic deep dive on the free side and identifying several stocks positioned to deliver rapid time-to-power—a critical bottleneck for deploying Nvidia’s next-gen, power-hungry AI systems. The key point, especially when paired with Microsoft’s lower capex guidance, is this: AI cannot scale without new power infrastructure. The Next Platform wrote on this topic, which you can read here.
Although Microsoft’s Q3 results showed some unusual quarterly variability due to capacity constraints, the bigger signal came from its forward-looking capex commentary. Management said capex in fiscal 2026 (beginning in the second half of calendar 2025) will grow at a slower pace than FY2025, with a higher mix of short-lived assets. While that suggests more spending on servers, GPUs, and networking gear, it also raises a concern: Microsoft may be pulling back on long-lead infrastructure because they simply can’t get power fast enough.
This doesn’t point to weak demand. Instead, it highlights an industry choke point: without access to sufficient power, Microsoft may be unable to deploy new GPUs or build data center capacity at the pace AI demand requires.
Conclusion
When it comes to Microsoft’s trajectory over the next few years – where do we begin? The media loves to cover the OpenAI partnership for good reason; it shows Nadella had a vision as to the early winner in the space and the fortitude to lock-in Azure’s positioning with early investments. This is not only the usage seen in Chat-GPT but rather from millions of developers who use OpenAI’s APIs and Azure platforms like Foundry.
That is only part of the outlook for Microsoft, there are dozens of AI enterprise integrations that make it hard to compete in the enterprise space. GitHub comes to mind, Teams, Office 365 and the many CoPilot features.
From there, Microsoft will be converting 900 million users from Windows 10 to Windows 11 over the next few years, helping to boost usage across the many AI apps that Microsoft has released over the past decade.
Lastly, we are seeing important key metrics suggest Microsoft could lead the Mag 7 stocks again. Commercial RPO has not only resumed growth rates above 30% but has done so on a revenue base that is hard to fathom at these RPO growth levels. Should Commercial RPO continue, it’s a strong hint that Microsoft’s lead in AI will be hard for AWS and Google Cloud to shake.
The I/O Fund is closely monitoring Microsoft for a potential entry point. Join us Thursdays at 4:30 p.m. in our Advanced Market webinars, where we’ll outline our strategy for initiating a position with maximum upside in mind. Learn more here.Learn more here.
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Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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