By Adam Clark

Microsoft is making up some ground after its poorly-received earnings report last week, but the software company might need to show better progress on custom chips for its rally to go much further.

Microsoft shares were up 0.8% at $417.72 in early trading Monday. The stock briefly fell below $400 last week as investors took fright at its annual guidance for around $190 billion in capital spending.

Microsoft was a Barron's stock pick in March, when shares were trading at around $402.

"The market is willing to look past very high capital spending only if it is accompanied by very high and accelerating cloud sales growth," wrote Ned Davis Research analyst Pat Tschosik in a research note.

Microsoft's Azure cloud-computing unit is hardly doing badly -- the company expects cloud revenue to grow between 39% and 40% in the current quarter. But that wouldn't be an acceleration from the 40% growth for its most recent quarter.

By comparison, Google parent Alphabet reported 63% growth for its smaller cloud unit. Amazon.com's Amazon Web Services grew at 28%, slower than Microsoft's cloud unit but accelerating to its fastest level in 15 quarters.

One factor helping both Alphabet and Amazon is strong demand for their custom artificial-intelligence chips. Amazon has said it has over $225 billion in revenue commitments for its custom Trainium AI chips, while Alphabet now plans to sell its Tensor Processing Units to third parties.

In contrast, Microsoft hasn't broken down similar demand for its Maia in-house chips. If Microsoft can show that its custom processors are a match for its rivals' hardware, that could provide another boost to the stock's recovery.

Write to Adam Clark at adam.clark@barrons.com

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May 04, 2026 11:23 ET (15:23 GMT)

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