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MSFT Earnings Preview: Azure, Stargate and CapEx in focus

Jay's InsightTuesday, Jan 28, 2025 3:43 pm ET

3min read

MSFT --

Microsoft is set to release its fiscal second-quarter 2025 earnings on January 29, 2025, after the market close. With expectations of steady revenue growth in its cloud computing and AI-driven segments, this report will be closely scrutinized by investors. Analysts anticipate earnings per share (EPS) of $3.11 and revenue of $68.9 billion, reflecting year-over-year growth of 6.1% in EPS and 11.1% in sales. However, it also marks Microsoft's slowest earnings growth in eight quarters and slowest sales growth in six quarters.

Management has provided guidance for Intelligent Cloud revenue, which includes Azure, between $25.55 billion and $25.85 billion, with analysts expecting growth of 19.4% year-over-year. Investors will be closely watching for any updates on Microsoft’s AI investments, CapEx trajectory, and the impact of DeepSeek on its broader cloud and AI strategy.

Key metrics to watch include Azure revenue growth, AI-driven expansion, capital expenditures, foreign exchange headwinds, and developments in the Stargate AI project. Azure revenue is projected to rise between 31 and 32 percent in constant currency, down slightly from 34 percent in the prior quarter. For fiscal Q3, analysts expect Azure revenue to accelerate to 33.4 percent as new data center capacity comes online. Microsoft’s investments in AI, particularly through its OpenAI partnership, Copilot tools, and Azure AI services, will be a key focus. The company expects AI-related revenue contributions to rise in the second half of fiscal 2025.

Microsoft’s capital expenditures for fiscal 2025 are projected to exceed $80 billion, a massive increase driven by its investments in AI and cloud infrastructure. The strengthening U.S. dollar has created headwinds, and analysts estimate a potential drag on top-line growth and a $0.16-$0.25 hit to EPS. Microsoft’s involvement in the $500 billion Stargate AI initiative, a U.S. government-backed effort to bolster domestic AI capabilities, could have significant long-term implications.

Azure continues to be the biggest contributor to Microsoft’s cloud revenue and is central to its AI push. In Q1, Azure and other cloud services revenue grew 33 percent, with AI-related services contributing roughly 12 percentage points to that figure. While growth is expected to slow slightly this quarter, a second-half reacceleration is anticipated due to increased enterprise adoption and data center expansion.

A key part of Microsoft’s cloud expansion strategy is its partnership with OpenAI, which has helped drive demand for Azure’s AI capabilities. Azure OpenAI usage has more than doubled over the past six months, with major enterprises like GE Aerospace, Hitachi, and LG integrating AI into their workflows.

The emergence of DeepSeek, the Chinese AI startup that developed an advanced language model for just $6 million, has sparked concerns about the sustainability of high-cost AI infrastructure investments. Microsoft, which has made significant investments in OpenAI and GPU-heavy AI training, could face questions about whether cheaper AI models pose a long-term risk to its Azure AI business.

President Donald Trump recently commented that DeepSeek is a "wake-up call" for U.S. tech companies, emphasizing the need for a stronger competitive focus. While Microsoft’s Azure-based AI services remain dominant, the rapid advancement of low-cost AI models could pressure its pricing power and shift the competitive landscape in cloud computing.

However, some analysts argue that Microsoft has been preparing for this shift. UBS noted that CEO Satya Nadella has already signaled a desire to pivot away from large-scale GPU training commitments and instead focus on scaling inference infrastructure for enterprise customers. If AI models become more efficient and require fewer resources, Microsoft’s AI-related CapEx growth could moderate beyond 2025.

Microsoft is a key participant in the Stargate AI project, a $500 billion initiative to strengthen U.S. AI capabilities. This initiative, backed by SoftBank, OpenAI, and Oracle, is expected to reshape the AI infrastructure landscape over the next decade. The Stargate project could give Microsoft a significant competitive edge in AI-driven cloud computing, particularly in government and enterprise sectors. Analysts at RBC believe that Microsoft’s participation in Stargate could lead to new AI contracts and reinforce its position against rivals like Amazon Web Services and Google Cloud.

Microsoft’s CapEx is projected to surpass $80 billion in fiscal 2025, making it one of the most aggressive spenders in the AI and cloud space. This massive investment is aimed at expanding Azure’s data center footprint, scaling AI computing capabilities, and building next-generation AI-powered infrastructure such as AI-enhanced cybersecurity and enterprise automation.

Despite concerns about rising AI costs, some analysts believe that Microsoft’s AI strategy will ultimately pay off. Piper Sandler recently raised Microsoft’s price target from $470 to $520, citing the company’s leadership in AI and cloud computing as long-term growth catalysts.

Microsoft’s stock has gained 9.7 percent over the past year, underperforming broader tech sector benchmarks but remaining a favorite among AI and cloud investors. Recent volatility, however, has raised questions about near-term growth expectations.

The stock’s technical setup is also worth noting. Microsoft has been consolidating for 29 weeks, with a buy point at $468.35. Options market pricing suggests a +/- $16.85 move post-earnings, reflecting relatively low volatility expectations. Analysts at BofA and Jefferies maintain strong buy ratings, citing an expected Azure reacceleration in Q3 and AI-driven margin expansion.

Investors should focus on several key areas when Microsoft reports earnings. Azure revenue growth and AI contributions will be crucial, as investors look for signs of second-half acceleration. CapEx outlook will be closely watched to see if spending remains at record levels or if Microsoft signals a more measured approach. DeepSeek’s impact on the AI infrastructure landscape will be another major topic, as investors assess whether AI models are becoming more cost-efficient and affecting Microsoft’s investment strategy. Stargate AI involvement could provide insights into Microsoft’s long-term positioning in the AI race. Finally, AI monetization strategy will be critical, particularly in expanding enterprise adoption of AI-powered services like Copilot and Azure OpenAI.

With Microsoft’s AI and cloud bets coming under increased scrutiny, this earnings report could set the tone for the company’s trajectory in 2025. Investors will be watching closely for signals that AI investments are paying off while CapEx discipline remains intact.

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