Microsoft’s monster quarter and strong outlook cements its status as an AI leader
Microsoft shares surged in extended trading on Wednesday after the tech giant reported strong quarterly results, fueled by an acceleration in cloud-computing revenue growth. An upbeat forecast for the current period solidified the stock’s advance. Revenue increased 18% year over year to $76.4 billion in its fiscal 2025 fourth quarter, beating the Street consensus estimate of $73.8 billion, according to data from LSEG. Earnings per share increased 24% from last year to $3.65, ahead of EPS estimates of $3.37, LSEG data showed. With shares up more than 8% in extended trading Wednesday, Microsoft is on track to join fellow Club name Nvidia in the exclusive $4 trillion market cap club. MSFT YTD mountain Microsoft’s year-to-date stock performance. Bottom line If there was any doubt about Microsoft’s leadership in artificial intelligence, this quarter put it to rest. Revenue growth at cloud computing unit Azure accelerated for the second quarter in a row and materially exceeded Wall Street’s consensus forecast. We also gained more clarity on the scale of the business, as CEO Satya Nadella revealed in the earnings release that Azure generated over $75 billion in revenue during Microsoft’s fiscal year 2025, marking a 34% year-over-year increase. Throughout the earnings call, management emphasized that cloud demand is outpacing supply — a positive sign for future growth. Microsoft’s revenue guidance for the three months ending in September— the first quarter of fiscal 2026 — was also better than expected. Additionally, capital expenditures are projected to be higher than anticipated, supporting the broader AI infrastructure thesis. In general, Club names such as Nvidia, GE Vernova and Eaton all benefit from the billions of dollars that tech giants are spending to build new centers. There’s so much to like in this Microsoft quarter that the stock move in after-hours trading is understandable. Nevertheless, it is an impressive reaction considering the stock has been nearly straight up since its last earnings release in April and closed Wednesday’s session essentially at an all-time high. This created a high bar into earnings, one that Google parent Alphabet could barely get over last week despite its solid results. But these numbers are a whole lot better than Alphabet’s, making Microsoft an exception to the “lackluster reaction to earnings theme” we’ve seen the last few weeks. By the way, fellow Club name Meta Platforms is also an exception after its dynamite quarter reported Wednesday night. Also, Microsoft’s cloud results and Meta’s advertising revenue growth are positive signs for Amazon’s cloud and advertising segments ahead of its earnings report Thursday evening. How online sales fared amid a cautious consumer will be the swing factor in that report. We are increasing our Microsoft price target to $600 a share off the better-than-expected quarter, guidance, and continuation of strong AI spending. We reiterate our 2 rating, meaning look to buy on pullbacks. Quarterly commentary Productivity and business processes reported the largest upside to revenue estimates by dollar amount and better-than-expected operating income. Operating margins also improved by about 250 basis points, equal to 2.5 percentage points. Microsoft 365 commercial cloud revenue increased 18% year over year, with growth in revenue per user driven by M365 Copilot and E5. Seats increased by 6% year over year. The company said its family of Copilot applications exceeded 100 million monthly active users across commercial and consumer, although it’s unclear how many of those are paid users. Microsoft 365 consumer cloud revenue growth increased 20% year over year, with subscribers increasing to 89 million from 87.7 million one quarter ago. LinkedIn revenue was up 9% and all business lines grew sales. Dynamics 365 revenue increased 23% year over year, driven by growth across all workloads. Intelligent cloud reported a strong revenue beat of nearly $1 billion, although operating income missed expectations by about $340 million and the operating margin contracted by about 70 basis points versus last year. Azure. Wow. Revenue growth from Azure and other cloud services accelerated to 39%, smashing the analyst consensus estimate of a 34.4% increase on a constant currency basis and management’s prior guidance of a 34% to 35% increase. The constant currency result gives a clearer picture because it strips out the effects of fluctuating foreign exchange rates. Azure’s results were also better than what more bullish investors anticipated, also referred to as the buy-side expectations. On the call, Nadella and CFO Amy Hood hyped up how they believe they are the leaders in AI infrastructure and took share every quarter in its fiscal year. They also touted their data center presence, with over 100 data centers across 70 countries. According to Nadella, that’s more than any other cloud provider. But it still sounds like these data centers can’t get built fast enough. Hood said demand is still higher than supply. Executives also offered up three reasons why Azure has been significantly better than expected for two quarters in a row: 1) ongoing migrations from on-premise servers to the cloud; 2) the scaling of cloud-native applications; and 3) new AI workloads. The more personal computing segment reported a 9% increase in revenue, beating estimates. Operating income was up significantly from last year but fell about $237 million short of estimates. All the main businesses reported annual increases in revenue, with Windows OEM and Devices up 3%; Xbox content and services up 13%; and Search and news advertising (ex-traffic acquisition costs) up 21%. The Bing search business is also a higher-margin product, helping the broader segment expand its operating margins by 436 basis points versus last year. Guidance The revenue outlook for the first quarter of fiscal year 2026 was better than expected. At the midpoint of each segment’s outlook, management expects revenue to total $75.25 billion, beating the consensus forecast of $74.18 billion. The largest source of revenue upside was in the productivity and business process segment, but the intelligent cloud unit also was a beat. In the latter, Microsoft expects Azure revenue growth to be approximately 37% in constant currency. That’s a slight deceleration from the reported quarter, but still well above the consensus estimate of 33.7%. Microsoft anticipates being computing capacity constrained through the first half of the fiscal year. On capex, management expects to invest over $30 billion in the first quarter — a big step up from the $20 billion spent in the first quarter of fiscal 2025. The rapid pace of spending used to draw the ire of the market, but Microsoft wouldn’t be investing so much if it didn’t have visibility into demand to back it up. Microsoft ended the quarter with a “commercial remaining performance obligation,” or backlog, of $368 billion. About 35% of this will be recognized in revenue in the next 12 months. This backlog and the recent surge in Azure revenue growth over the past two quarters add credibility to management’s capex strategy. For the full fiscal year, the company provided high-level guidance of double-digit revenue and operating income growth alongside relatively unchanged operating margins. The company did not provide a capex estimate for the full fiscal year, but if it spends $30 billion in every quarter then the full-year amount would be $120 billion, significantly above the FactSet consensus estimate of $90.7 billion. (Jim Cramer’s Charitable Trust is long MSFT, NVDA, GEV, ETN, META and AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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