Microsoft Stock Soars 16% in May, Driven by Azure's 33% Revenue Growth

Microsoft's stock price has surged, nearing its historical high, driven by the robust performance of its Azure cloud computing business. After months of stagnation, the software giant's stock has climbed 16% in May, positioning it for its best monthly performance in over three years. This rally is fueled by the overall rebound in the U.S. stock market and Azure's better-than-expected earnings, as investors bet on artificial intelligence (AI) to sustain growth in the business.

Nancy Tengler, CEO of Laffer Tengler Investments, noted, "The proportion of AI in these revenues is increasing, and I believe this is a sustainable growth point." This starkly contrasts with last year when concerns over Microsoft's position in the AI race and sluggish Azure growth weighed on its stock performance. In 2024, Microsoft's stock rose by only 12%, making it the worst performer among the so-called "Magnificent Seven," which includes Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla.

So far this year, Microsoft's stock has risen 9%, outperforming all its peers except Meta, which has seen a 10% increase. Beyond the minimal impact of Donald Trump's tariff policies, Microsoft has emerged as one of the biggest winners in a strong earnings season for large tech companies. The company, headquartered in Redmond, Washington, reported third-quarter revenue and profits that exceeded Wall Street expectations, with Azure's performance being particularly noteworthy. Azure's revenue grew by 33%, surpassing forecasts.

Azure's sales encompass AI services, including computational support for tools like OpenAI's ChatGPT, as well as databases and on-demand storage. In April, Microsoft's Chief Financial Officer, Amy Hood, stated that the company's non-AI businesses also performed better than expected in the recent quarter. This week, a team led by TD Cowen analyst Derrick Wood predicted that Azure's AI-related revenue would rise from approximately 4 billion dollars in the 2024 fiscal year to around 24 billion dollars by the 2026 fiscal year. These analysts, who rate the stock as a "buy," have raised their target price from 490 dollars to 540 dollars, indicating a potential 18% increase from Wednesday's closing price. Out of 72 analysts covering Microsoft, only 6 rate it as a "hold," with none recommending a sell.

In a report, TD Cowen analysts wrote, "Azure's return to a growth trajectory, with a stable mid-30% growth rate, should reinforce the positive narrative around Azure and drive more capital into Microsoft's stock." Currently, Microsoft's price-to-earnings ratio stands at 30 times the expected profit for the next 12 months, higher than both the Nasdaq-100 Index and its own 10-year average of around 26 times. Over the past week, Microsoft's stock has shown lateral movement, which Tengler interprets as a sign of limited short-term upside.

On the other hand, Kevin Walkush, portfolio manager at Jensen Investment Management, expects the stock to continue rising, citing indications that the company will generate more revenue from AI services. "Microsoft could be one of the best long-term investment opportunities in the AI field," Walkush said, noting that his firm, like Tengler's, holds Microsoft stock. "Companies like Microsoft often continue to profit and perform well because they can consistently monetize their daily business activities, and their profit margins are usually high."