Microsoft's Q4 FY25 Results Show Strong Demand for Cloud Services, Exceeding Supply

Microsoft reported strong Q4 FY25 results, particularly in the cloud segment. Demand for computing services is expected to outpace supply until year-end. The company's Azure segment saw a 34% year-over-year increase in growth. Despite supply constraints, Microsoft maintains a strong buy rating.

Microsoft Corporation (NASDAQ: MSFT) reported robust Q4 FY25 results, with the cloud segment driving significant growth. The company's Azure segment experienced a 34% year-over-year (yoy) increase, reaching $75 billion in fiscal 2025 [1]. Despite supply constraints and capacity tightness until year-end, Microsoft maintains a strong buy rating due to the strong demand for computing services [1].

The company's cloud business achieved a record scale, with $168 billion in annual revenue, up 23% in FY25. Azure's growth is particularly notable, with a 37% yoy increase expected in Q1 FY26. Microsoft has expanded its data center footprint, adding 400 data centers in 70 regions and approximately 2GW of new capacity in the past 12 months [1].

Microsoft's CFO, Amy Hood, highlighted that demand remains higher than supply while the company continues to bring in more data center capacity. The company's aggressive scaling of AI infrastructure has led to a decrease in gross margins, with the Microsoft Cloud gross margin at 68% in FY25, down 2 percentage points from last year [1].

However, the company's top-line growth has outweighed the risk of margin compression. Despite the $6B discount with the US government, which includes $3.1B front-loaded to the first year, the company's growth in cloud and Azure remains solid [1]. The company's backlog of $368 billion at the end of last quarter suggests strong revenue visibility [1].

Microsoft's strong buy rating is supported by the continued growth in the cloud segment and the company's ability to maintain a premium pricing position despite market share gains. The company's P/E ratio is above its 5-year historical average, positioning the stock for near-term perfect execution [1].

Investors should keep an eye on the Azure segment's growth and the company's ability to manage capacity constraints. Additionally, the impact of the $6B discount on margins and the company's CapEx spend will be key factors to watch as Microsoft moves into the back half of the year [1].

References:
[1] https://seekingalpha.com/article/4819303-microsoft-stock-computing-demand-to-outpace-supply-until-year-end