Microsoft quiets critics, delivers the kind of quarter worthy of its stock pop
Microsoft delivered a strong quarter Wednesday evening, with beats nearly across the board. The biggest standout was Azure’s accelerating revenue growth, which caught the market by surprise. Revenue increased 13% year over year to about $70 billion in its fiscal 2025 third quarter, beating the Street consensus estimate of $68.4 billion, according to data from LSEG. Earnings per share increased 17% from last year to $3.46, ahead of EPS estimates of $3.22, LSEG data showed. MSFT YTD mountain Microsoft YTD The strong results combined with stronger revenue guidance for the current quarter sent shares up nearly 7% in after-hours trading. We’re reiterating our 2 rating and maintain our $500 price target. Bottom line Microsoft is back on track. The consensus view here has been that Microsoft was somewhat lost in its artificial intelligence strategy after disappointing three months ago in fiscal Q2. Adding to the confusion was that a somewhat frayed relationship with OpenAI – or at least the perception of one — could leave Microsoft vulnerable to falling behind in the AI race. However, the software giant posted better-than-expected revenue across all three main businesses and expanded its operating margins by about 110 basis points year over year. In addition, several media and press reports suggested Microsoft was pulling back its data center commitments and canceling leases, which some took as a sign that demand was falling off a cliff. As it turned out, though, the opposite happened. The company silenced the bears by delivering accelerating revenue growth at Azure, its cloud computing business. To top it off, revenue guidance for its fiscal fourth quarter (current quarter) was better than expected for each segment — and Azure, too. Microsoft Why we own it : Microsoft is a core backbone of global productivity thanks to its Office 365 suite and hybrid cloud platform Azure. The company is also proving itself to be a key provider of artificial intelligence tools due, in part, to its large investment in OpenAI, the startup behind ChatGPT. We also like what it’s doing in the video gaming industry as it looks to grow recurring revenue streams. Competitors : Amazon , Alphabet and Salesforce Weight in portfolio : 2.9% Most recent buy : Aug. 5, 2024 Initiated : Dec. 4, 2017 We figured Microsoft would get its act together after disappointing last quarter, but we did not see a beat of this magnitude coming. We suspect few did, explaining why the stock is up so much in after-hours trading. If these gains hold on Thursday, Microsoft will be the only Magnificent Seven stock with a year-to-date gain. Meta Platforms isn’t far behind, thanks to its positive results Wednesday evening. Amazon and Apple , all fellow Club names, report after Thursday’s closing bell. Quarterly commentary Productivity and business processes reported better-than-expected revenue and operating income. Operating margins also improved by 2 percentage points. Microsoft 365 commercial cloud revenue growth increased 12% year over year, with seat growth up 7%. Microsoft 365 consumer cloud revenue growth increased 10% year over year, with subscribers increasing to 87.7 million from 86.3 million one quarter ago. LinkedIn revenue was up 8% and all business lines grew sales. Dynamics 365 revenue increased 16% year over year, driven by growth across all workloads. Intelligent Cloud reported a strong revenue beat, although operating income missed expectations and the margin contracted by about 1.5 percentage points. Azure was a standout performer here with revenue growth accelerating to 33%, or 35% on a constant currency basis. This was a big beat against the FactSet consensus estimate of 30.2% growth, or 31.4% in constant currency. The constant currency (cc) result gives a clearer picture because it strips out the effects of changing foreign exchange rates This was a big surprise. Keep in mind that management originally guided to 31% to 32% revenue growth in the quarter, and some of the more bearish investors feared an even worse outcome based on unconfirmed “checks” that indicated the company was reining in its AI infrastructure buildout plans. Looking closer, AI services were an even bigger driver of growth, contributing 16 points to Azure’s growth rate. That’s up from 14 points in the quarter before. One driver of the acceleration here was Microsoft adding capacity faster than expected. But non-AI services held its own, with revenue growth accelerating in its enterprise customer segment. This is an important turnaround from last quarter’s “go to market execution challenges.” Non-AI services was the part of Azure that outperformed the most versus management’s expectations. The more personal computing segment posted the largest revenue upside of the three segments with 6% year-over-year growth, thanks to a 3% increase in Windows OEM (original equipment manufacturer) and devices revenue, and an 8% increase in Xbox and content and services revenue. But the fastest-growing revenue stream was search and news advertising. It’s also a higher margin business, helping the segment expand its operating margins by about 3 percentage points. As a whole, however, the segment did miss expectations on operating income. Guidance The revenue outlook for its fiscal 2025 fourth quarter was better than expected. The largest upside surprise versus the consensus estimate was from the productivity and business processes unit. But investor focus will always be on Azure, and this time it did not disappoint. The company guided Azure revenue growth to 34% to 35% on a constant currency basis, which is stable from the reported quarterly result and well ahead of the 31.7% consensus estimate per FactSet. Collectively, Microsoft guided quarter revenue to about $73.7 billion at the midpoint, beating the consensus of $72.23 billion. The recent weakness in the U.S. dollar flipped currency from a headwind to a tailwind, with the company expecting foreign exchange fluctuations to increase total revenue growth by 1 percentage point. As for capital expenditures, the company’s outlook was unchanged. They continue to expect capex to grow at a lower rate in fiscal year 2026, with a greater mix of short-lived assets like CPUs (central processing units) and GPUs (graphics processing units like the kind Club name Nvidia makes) versus long-lived assets like infrastructure, power, and land. (Jim Cramer’s Charitable Trust is long MSFT, META, AMZN, AAPL, NVDA. See here for a full list of the stocks.) 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Microsoft CEO Satya Nadella speaks at an event commemorating the 50th anniversary of the company at Microsoft headquarters in Redmond, Washington, on April 4, 2025.
David Ryder
Microsoft delivered a strong quarter Wednesday evening, with beats nearly across the board. The biggest standout was Azure’s accelerating revenue growth, which caught the market by surprise.