Microsoft (NASDAQ:MSFT) has been one of the most consistent companies in the past few years. And in the past two years, it has delivered some solid growth metrics. In fact, the recent AI wave wouldn’t have been possible if it wasn’t for Microsoft pouring billions into OpenAI.
That said, it hasn’t been all that smooth recently due to DeepSeek offering a lot of competition. Before that, a clip of Satya Nadella being “good” with his $80 billion went viral, and it seems as if Microsoft is only doubling down on AI from now.
It recently reported its fiscal Q2 2025 earnings. The stock tanked by 4% but started recovering immediately and is now down by 2% after earnings. Let’s take a look into what happened.
Microsoft’s Q2 2025 earnings beat analyst expectations on key metrics but it has seen some mixed reactions due to some softness in cloud performance and its AI investments. Its Intelligent Cloud segment saw revenue of $25.5 billion, up 19% year-over-year. This is slightly below the $25.89 billion estimate. Azure grew 31% year-over-year and was slightly below the 31.8% expected. Net income of $24.1 billion grew 10% year-over-year.
Microsoft Cloud revenue was $40.9 billion and grew 21% year-over-year. It narrowly missed the $41.1 billion forecast.
As for Microsoft’s Productivity and Business Processes segment, it delivered $29.4 billion in revenue, up 14% year-over-year. It was led by Microsoft 365 Commercial (16% growth) and Dynamics 365 (19% growth).
Its More Personal Computing segment had flat revenue growth at $14.7 billion. However, Windows OEM grew 4% and search/advertising grew 21%. The latter helped in offsetting Xbox hardware sales.
Microsoft’s AI revenue is growing tremendously fast. Annual run rate reached $13 billion (175% year-over-year). Azure contributed 13% to this growth. Moreover, Capex hit $22.6 billion for AI/data center expansion. Capex usually isn’t a good thing, especially when returns are still speculative, but in the case of AI, the market has been more than generous in rewarding any AI-related growth. Microsoft is projected to spend $80 billion in FY2025.
Microsoft is also collaborating on the $500 billion Stargate AI infrastructure project with OpenAI. It doesn’t seem like DeepSeek will collapse the AI sector entirely. Rather, Microsoft and other Big Tech companies are willing to double down and foot the bill until these AI companies can adapt and compete with DeepSeek in terms of cost and efficiency.
It does seem that Microsoft is adapting since it added DeepSeek’s R1 model to Azure’s AI foundry.
Wall Street is overwhelmingly bullish on Microsoft, and it’s hard not to be. The White Collar sector can’t live without it. Almost everyone uses Excel, or a Microsoft 365 product to some extent. And even if they’re not, they are likely using Windows.
Piper Sandler believes Azure has a path to a $100 billion annual run rate by 2026 and that AI monetization is possible. The latter is especially due to Microsoft’s ability to integrate DeepSeek’s model into Azure.
On the flip side, analysts from Raymond James and Jefferies are citing rising capex and margin compression, along with valuation concerns for a lower price target.
No one seems to be truly bearish on Microsoft. There are no reasons to be too bearish here, as most AI companies have started to recover and analysts are slowly looking at DeepSeek as an opportunity rather than a threat for AI companies to make even smarter AI models with expanded capacity. That $80 billion from Microsoft could stretch a lot further, and it’s not Microsoft’s problem if OpenAI is the one struggling. its investments into OpenAI are a drop in the bucket compared to its earnings. The party will likely continue as long as the broader tech sector does well.