Microsoft earnings beat forecasts but misses big where it matters most

Microsoft’s fiscal 2025 second-quarter earnings report revealed mixed results, with the tech giant beating overall revenue and earnings estimates but falling short on crucial cloud metrics, leading to a 5% stock decline in after-hours trading.

Key performance metrics: Microsoft reported revenue of $69.6 billion, up 12% year over year, and earnings per share of $3.23, representing a 10% increase.

• Revenue exceeded analysts’ expectations of $68.78 billion
• Earnings per share surpassed the estimated $3.11
• AI business achieved an annual revenue run rate of $13 billion
• Azure contributed 13 percentage points to cloud revenue growth, up from 12 points in the previous quarter

Cloud performance concerns: Azure cloud revenue growth emerged as a significant disappointment, failing to meet market expectations and raising questions about the return on AI investments.

• Azure revenue grew 31% year over year, falling short of analysts’ expectations
• Management cited “go to market execution challenges” with indirect sales channels
• The anticipated second-half revenue growth reacceleration failed to materialize
• AI services remain capacity constrained despite significant infrastructure investments

Segment breakdown: Different business segments showed varying performance levels, with some exceeding expectations while others fell short.

• Productivity and business processes exceeded forecasts with double-digit growth
• Microsoft 365 commercial cloud revenue grew 15% year over year
• LinkedIn revenue increased by 9%
• Gaming and Xbox hardware revenues declined while Windows OEM showed growth

Forward guidance: Management’s outlook for fiscal Q3 2025 fell below analyst expectations, particularly in the crucial cloud segment.

• Azure revenue growth guidance of 31-32% suggests stabilization rather than acceleration
• Foreign exchange headwinds expected to decrease total revenue growth by 2 percentage points
• Operating margins for fiscal year 2025 projected to improve slightly year over year
• Capital expenditure growth rate expected to decrease in fiscal year 2026

Strategic implications: Despite challenges in cloud execution, CEO Satya Nadella remained optimistic about AI opportunities and efficiency improvements.

• Nadella emphasized the potential of more efficient and accessible AI models
• The company plans to shift spending from infrastructure to processing units
• Management expects AI democratization to drive increased demand
• Questions remain about the impact of emerging competitors like DeepSeek

Market perspective: While Microsoft’s stock trades at a premium valuation of 32 times forward earnings, execution challenges raise questions about sustaining this multiple.

• Analysts maintain a $500 price target despite mixed results
• The market appears focused on cloud growth acceleration to justify AI investments
• Current valuation demands consistent execution and met expectations

Future considerations: Microsoft’s transition toward AI-driven growth faces near-term execution hurdles while maintaining long-term potential. The company’s ability to address cloud execution issues while maximizing returns on AI investments will likely determine its success in coming quarters.