/Microsoft%20sign%20at%20the%20headquarters%20by%20VDB%20Photos%20via%20Shutterstock.jpg)
Microsoft (MSFT) has been a legacy player in the tech sector for decades, consistently demonstrating resilience and innovation. It is one of the Magnificent Seven stocks, heavily influencing the stock market. In recent years, the tech titan has aggressively pursued cloud computing and artificial intelligence (AI).
Microsoft has a diverse range of revenue streams, which contribute to its strong financial position. In its most recently reported quarter, Microsoft delivered another strong quarter of double-digit revenue and earnings growth, fueled by continued demand for its cloud and AI offerings.
However, the stock is down 9.5% year-to-date due to broader market volatility, which could be a good opportunity to buy it on the dip.
Cloud and AI Expansion are Microsoft’s Growth Catalysts
In the second quarter of its fiscal 2025, the company reported revenue of $69.6 billion, a 12% increase year-over-year, with earnings per share (EPS) rising 10% to $3.23. Microsoft’s gross margin rose to 69%, thanks to a shift toward higher-margin businesses and improvements in gaming and search.
During the Q2 earnings call, CEO Satya Nadella stated that Microsoft’s AI-driven business expanded significantly, with annual revenue run rates for AI services exceeding $13 billion, growth of 175% year-over-year. The Microsoft Cloud segment generated $40.9 billion in revenue, up 21% year-over-year. Microsoft Cloud gross margins stood at 70%, slightly lower than in the prior-year period due to investments in AI infrastructure. Azure, one of Microsoft’s most profitable divisions, competes with Amazon (AMZN) Web Services and Google (GOOGL) Cloud, contributing significantly to the company’s revenue growth. Azure maintained its strong performance in the quarter, with revenue from Azure and other cloud services increasing 31%. AI services made a significant contribution, increasing by 157% year-over-year and exceeding expectations despite supply constraints.
Revenue from the Productivity and Business Processes segment reached $29.4 billion, up 14% year-over-year. The Intelligent Cloud segment generated $25.5 billion in revenue, representing a 19% increase. Azure’s AI services continued to outperform, driving growth in the segment. Revenue from the More Personal Computing segment remained stable at $14.7 billion, thanks to higher-than-expected demand for Windows OEM and Call of Duty sales in gaming. Search and news advertising revenue increased by 20%, thanks to strong usage from a third-party partnership and increased adoption of Edge and Bing.
In the quarter, capital expenditures totaled $22.6 billion, with more than half going toward long-term assets to support cloud and AI growth. This increase in capex resulted in a 29% decrease in free cash flow to $6.5 billion. Nonetheless, the company returned $9.7 billion to shareholders in dividends and share repurchases during the quarter.
More Growth Ahead
Microsoft’s growth is expected to continue, fueled by several key trends.
Azure’s market share is increasing due to AI investments, which are being driven by digital transformation across industries. Furthermore, Microsoft’s acquisition of Activision Blizzard solidifies its position in gaming and the evolving metaverse. With rising cyber threats, Microsoft’s security solutions are becoming increasingly important for businesses worldwide. With these growth drivers, it is well-positioned for long-term growth in the coming quarters.
Microsoft expects continued demand for its cloud and AI offerings in Q3, but foreign exchange headwinds are expected to cut total revenue growth by two percentage points.
The company continues to invest heavily in AI infrastructure, with supply constraints expected to ease by the end of fiscal year 2025. Full-year fiscal 2025 revenue and operating income are expected to grow at double-digit rates, with operating margins improving slightly year-over-year. Meanwhile, analysts covering the stock expect revenue and earnings to increase by 13% and 11.7% in fiscal 2025. Revenue and earnings are expected to increase by 13.8% each in fiscal 2026. Trading at 25 times forward earnings, Microsoft remains a promising stock for long-term investors to buy now.
What Is the Price Target for Microsoft Stock?
On Wall Street, MSFT stock is a “Strong Buy.” Of the 45 analysts covering the stock, 39 rate it a "Strong Buy,” four rate it a “Moderate Buy,” and two say it is a “Hold.” The average analyst target price of $505.54 suggests the stock has upside potential of 32% from current levels. Plus, its high target price of $600 implies that the stock could rise as much as 57% from current levels.
