Microsoft's Strong Results Overshadowed by Azure Slowdown; Watch for guidance on the call

Microsoft (NASDAQ: MSFT) reported fiscal Q2 2025 earnings on Wednesday, exceeding Wall Street expectations on both earnings per share (EPS) and revenue. The company posted EPS of $3.23, surpassing the consensus estimate of $3.11. Revenue for the quarter came in at $69.63 billion, ahead of the anticipated $68.92 billion. Despite these positive results, Microsoft shares fell 4% in after-hours trading, largely due to a slight miss in Azure cloud revenue, which investors had been closely monitoring.

Azure and Cloud Performance Weigh on Market Reaction

Microsoft’s Intelligent Cloud segment, which includes Azure, reported revenue of $25.54 billion, slightly below the estimated $25.89 billion. Azure and other cloud services revenue grew 31% year-over-year, but this was shy of the 31.8% expectation. This marked a slight deceleration from the previous quarter’s 33% growth, raising concerns among investors about the pace of expansion in Microsoft's crucial cloud business. However, Microsoft reassured investors by stating that it expects Azure sales to accelerate in the second half of the fiscal year, making upcoming guidance particularly important.

While the cloud business faced minor setbacks, other segments performed well. Microsoft’s Productivity and Business Processes unit, which includes Office 365 and LinkedIn, generated $29.44 billion in revenue, surpassing the $28.04 billion estimate. Meanwhile, the More Personal Computing division, which includes Windows, Surface, and Xbox, brought in $14.65 billion, slightly above estimates of $14.42 billion.

Key Business Metrics and AI Growth

A key highlight from the report was Microsoft’s growing artificial intelligence (AI) business. The company revealed that its AI-related revenue has surpassed a $13 billion annualized run rate, reflecting an astonishing 175% year-over-year growth. AI contributed 13 percentage points to Azure’s growth, up from 12 points in the prior quarter, demonstrating the increasing integration of AI services into Microsoft’s cloud offerings.

Additionally, commercial bookings climbed 67%, partly due to increased commitments from OpenAI, in which Microsoft has invested nearly $14 billion. Capital expenditures reached $15.8 billion, in line with expectations, as the company continues to ramp up spending on AI and cloud infrastructure. Microsoft CFO Amy Hood noted that the company remains committed to balancing operational discipline with aggressive investments in these high-growth areas.

Stock Reaction and Market Implications

Following the earnings release, Microsoft shares dropped to $425 in after-hours trading, a key technical level corresponding to its 200-day moving average. However, the stock managed to bounce off that level, suggesting that investors are awaiting further clarity from the company’s guidance before making more decisive moves.

Notably, Amazon (NASDAQ: AMZN) shares also slipped by about 1% in after-hours trading, reflecting broader concerns about cloud computing demand. Microsoft’s commentary on expected acceleration in Azure growth later in the year will be a critical factor in determining whether the stock can regain momentum.

Looking Ahead: Investor Focus on Guidance

Investors now turn their attention to Microsoft’s earnings call, where they hope to gain more insight into Azure’s expected growth trajectory and the broader demand for cloud computing and AI services. Microsoft’s ability to reassure investors about a rebound in cloud growth will likely dictate short-term price movements. Additionally, analysts may probe management on capital expenditure plans, AI-driven revenue opportunities, and how the company plans to navigate intensifying competition in the cloud sector.

Despite the after-hours decline, Microsoft remains a dominant force in enterprise software, AI, and cloud computing. The company’s strong profitability and continued investment in high-growth areas suggest it remains well-positioned for long-term success. However, given elevated market expectations and the importance of Azure’s performance, investors will be watching closely for any shifts in Microsoft’s outlook that could impact sentiment moving forward.