Microsoft Corporation develops and supports software, services, devices and solutions worldwide. The Productivity and Business Processes segment offers office, exchange, SharePoint, Microsoft Teams, office 365 Security and Compliance, Microsoft viva, and Microsoft 365 copilot; and office consumer services, such as Microsoft 365 consumer subscriptions, Office licensed on-premises, and other office services.
Microsoft reported strong second-quarter results for fiscal 2025, with revenue and profit surpassing Wall Street expectations. The company posted revenue of $69.6 billion, a 12% year-over-year increase, exceeding the estimated $68.9 billion. Net income reached $24.1 billion, translating to $3.23 earnings per share (EPS), ahead of the $3.11 consensus forecast. Operating income also outperformed expectations at $31.65 billion. However, the company’s aggressive investments in artificial intelligence (AI) and cloud infrastructure contributed to a sharp rise in capital expenditure, which came in at $22.3 billion, above the projected $21 billion.
Microsoft’s Azure and cloud services division recorded 31% revenue growth, slightly below analyst expectations of 32% and down from the previous quarter’s 34% gain. The slowdown reflects ongoing supply constraints, as Microsoft struggles to expand its data centre capacity quickly enough to meet demand. Despite this, AI remains a key driver of growth, with 13 percentage points of Azure’s expansion attributed to AI-related services, up from 12 points in the previous quarter. Microsoft now expects AI-driven revenue to reach an annualised run rate of $13 billion, marking a 175% year-over-year increase.
The broader performance of Microsoft’s business segments showed mixed results. Microsoft Cloud revenue came in at $40.9 billion, slightly missing the $41.1 billion estimate. Similarly, Intelligent Cloud revenue of $25.5 billion fell short of the $25.89 billion forecast. However, the Productivity and Business Processes division, which includes Office 365 and LinkedIn, performed strongly, delivering $29.4 billion in revenue, exceeding expectations of $28.04 billion. Meanwhile, More Personal Computing, including Windows, remained steady at $14.7 billion, in line with estimates.
Despite the overall strength in earnings, Microsoft’s stock declined 3.7% in after-hours trading before recovering slightly. The market reaction likely reflects concerns over the slowdown in cloud growth, which is a core driver of Microsoft’s valuation. Additionally, capital expenditure continues to rise, with Microsoft planning to spend $80 billion this year on AI data centres. While these investments are necessary for long-term AI expansion, investors may be questioning whether the revenue generated from AI services will materialise quickly enough to justify the significant outlays. Furthermore, emerging competition in AI, particularly from Chinese tech startup DeepSeek, has added uncertainty about Microsoft’s competitive edge.
Overall, Microsoft remains a dominant force in AI and cloud computing, but the combination of cloud deceleration, high spending, and increasing competition weighed on investor sentiment. While long-term AI prospects are promising, short-term challenges related to supply constraints and profitability pressures may continue to create volatility in the stock. Nevertheless, MSFT’s remains a valid buy/hold recommendation in the US Growth portfolio, and it is unlikely that the stock will be removed based on its relative share price momentum when the portfolio is next rebalanced on February 3rd 2025.
