Microsoft (NASDAQ:MSFT) posted quarterly results that blew past expectations. Revenue grew 13% year-over-year to $70.07 billion, and profits were up 18% to $25.8 billion, both well ahead of Wall Street’s expectations. The real headline, though, was Azure’s 33% revenue growth, with 16 percentage points of that coming directly from AI services. This is an acceleration from the previous quarter.
Microsoft's strong performance is particularly noteworthy given the current macro headwinds. Earlier this year, investors were fearful about potential oversupply in cloud infrastructure and the impact of tariffs announced in early April. However, Microsoft has basically silenced these doubters.
Microsoft’s CEO Satya Nadella said that “cloud and AI are the essential inputs for every business to expand output, reduce costs, and accelerate growth”. Microsoft’s Intelligent Cloud segment grew 21% to $26.75 billion in revenue.
The company not only exceeded current quarter expectations but also issued upbeat guidance. It now projects revenue between $73.15 billion and $74.25 billion for the next quarter. This is well above the analyst consensus of $72.26 billion.
On top of that, Microsoft is doubling down on its AI infrastructure, with capital expenditures set to hit $80 billion in fiscal 2025 to support surging demand. Management even warned of potential AI capacity constraints as demand continues to outstrip supply.
Microsoft’s stellar earnings lifted up the entire stock market and completely offset the bearishness we’ve seen yesterday after the weak GDP report. The AI investment cycle could be far from over if this continues. This is the same company that caused skepticism about AI in the first place after it canceled some data center leases earlier this year, and had a long-term impact that was worse than the DeepSeek spook.
Now that Microsoft seems to have doubled down on AI and has said that the momentum is actually increasing, this could trigger a new AI rally. It’s not just Microsoft that’s posting great numbers on AI, since Meta (NASDAQ:META) did the same. Meta increased its CapEx guidance, and this in turn could help chipmakers and add even more tailwinds. Microsoft plans to spend $80 billion on infrastructure in fiscal 2025.
Obviously, no one knows whether or not dumping this much into AI will be profitable as a whole. But if you look into companies with big cloud segments, AI may still turn out to be a net gain even if AI itself continues to be unprofitable. Private companies are mostly the ones posting losses. And they are posting losses only because that money is making its way into cloud computing giants like Microsoft.
The AI rally seems back for now, though it is very likely to be temporary due to the macros and tariffs. MSFT stock is still down 8.3% from its peak and could continue rallying in the meantime. The consensus price target of $503.3 implies 17.3% upside.
