MSFT Earnings Preview: Azure growth and CAPEX in focus
3min read Microsoft is set to report Q1 FY2025 earnings on October 30 after the market close, with FactSet estimates for EPS at $3.10 and revenue at $64.57 billion. Analysts are keenly focused on Azure’s performance as Google’s recent cloud revenue beat has raised expectations, while Microsoft’s growing investments in AI and heightened CAPEX are expected to influence its margin outlook. With Azure growth critical to Microsoft’s revenue composition, investors are looking for strong cloud results to underscore the competitive edge that AI tools like Copilot bring to its ecosystem.
Truist analysts maintain a bullish stance, anticipating robust enterprise demand for Microsoft’s cloud and AI solutions, as reflected in positive sentiment from customers and partners. Microsoft’s expanding AI footprint, especially through Azure and partnerships with OpenAI, is projected to drive long-term growth, though analysts note that adoption rates and tangible results from AI offerings will be a key point on the earnings call. However, BMO has tempered expectations, removing Microsoft as a top pick due to muted feedback on M365 Copilot adoption and concerns about high CAPEX levels which could curb near-term margin expansion.
The Azure segment’s growth rate, which Goldman Sachs projects will contribute to an estimated 14% revenue increase, is crucial for analysts evaluating Microsoft’s ability to maintain its cloud momentum. Azure’s ability to sustain high-double-digit growth, despite intensified competition from Google and Amazon, will be essential for meeting and possibly exceeding market expectations. Microsoft’s AI-driven initiatives, particularly in enterprise solutions, are expected to support this growth, yet analysts will also be watching for more concrete guidance on revenue generated directly from AI deployments.
Microsoft’s broader AI and cybersecurity strategies are seen as long-term catalysts by Truist, which expects cybersecurity to continue delivering upside for Microsoft’s cloud services. Satya Nadella’s strategy to integrate AI into Microsoft’s comprehensive security suite could bolster its share in the security software market. Truist is optimistic that Microsoft’s scale in cybersecurity, alongside its extensive AI investments, provides a sustainable growth pathway that could exceed current expectations, though these may not materially impact immediate revenue results.
Oppenheimer’s recent downgrade reflects concerns around Microsoft’s earnings expectations being too high, especially with anticipated OpenAI losses potentially impacting FY2025 results. With projected losses from AI investments and a competitive landscape, analysts see Microsoft facing pressure to justify its valuation, which stands at 35x forward earnings, especially given that CAPEX requirements remain high as it scales AI capabilities. The focus on earnings guidance will be critical for analysts recalibrating expectations for AI profitability timelines.
Goldman Sachs and other firms have also adjusted their price targets due to these uncertainties, underscoring a cautious outlook on Microsoft’s near-term financial performance. Despite enthusiasm for AI, analysts acknowledge that the market may take time to fully realize Microsoft’s anticipated AI-driven growth, with Oppenheimer particularly noting risks if Microsoft’s margins are strained by OpenAI-related expenses and delayed revenue capture. Microsoft’s expense management and CAPEX trajectory will likely be a focal point in the earnings call to assess how these factors impact profitability.
Microsoft's Q2 earnings results were mixed, with EPS of $2.95 slightly above expectations and revenue of $64.73 billion, just edging out the consensus estimate of $64.52 billion. However, Intelligent Cloud revenue came in slightly below expectations at $28.5 billion, with Azure cloud growth slowing to 29%, below the 30.6% forecast. This deceleration in Azure's growth, particularly in the face of strong cloud revenue from competitors like Google, raised concerns among analysts about Microsoft’s ability to maintain its cloud momentum.
Microsoft's capital expenditures surged 77.6% year-over-year to $18 billion, driven by ongoing investments in AI and cloud infrastructure, which executives emphasized as essential for long-term growth despite near-term margin pressures. The significant spending sparked mixed reactions, as some analysts viewed the CAPEX increase as necessary for maintaining AI leadership, while others worried about immediate profitability impacts. Microsoft’s Productivity and Business Processes and More Personal Computing segments performed well, slightly exceeding expectations, but the focus remains on Azure’s ability to rebound and sustain high growth rates in future quarters.
Following the announcement, Microsoft’s stock fell over 7% in after-hours trading, reflecting investor caution over Azure’s performance and the impact of higher CAPEX. Analysts remain cautiously optimistic, noting that while Azure's growth faces short-term constraints, Microsoft's leadership in AI and its expanding enterprise offerings position it for longer-term gains. Microsoft's guidance for 28%-29% growth in Azure for the next quarter and updates on its AI-driven Copilot adoption are key metrics that analysts and investors will closely monitor as signals of future revenue potential.
Finally, Microsoft’s stock price has lagged the Nasdaq 100 this year, reflecting market skepticism regarding short-term AI gains and CAPEX implications. With mixed analyst sentiment surrounding AI deployment timelines, Copilot adoption, and Microsoft’s valuation, the earnings release could be a decisive moment for investors gauging Microsoft’s potential for sustained growth in its cloud and AI businesses. The guidance provided for CAPEX and AI expenditures, as well as clarity on Azure’s growth targets, will be pivotal in determining market reactions post-earnings.
