Microsoft Stock Is a ‘Strong Buy’ Despite Slowing Azure Growth

Microsoft (MSFT) reported its second-quarter (Q2) fiscal 2025 financial results on Jan. 29, which exceeded market expectations for revenue and earnings per share (EPS). The technology giant’s top line for the quarter reached $69.6 billion, about a 12% increase year-over-year, surpassing the Street’s expectations of $68.78 billion. Additionally, the company’s EPS climbed 10% to $3.23, exceeding analysts’ forecasts of $3.11.

However, despite this robust performance, Microsoft's stock faced selling pressure, slipping 4.63% in after-hours trading. This reflects investors' concern regarding the slowing growth of Microsoft’s Intelligent Cloud division, which includes its Azure platform — a key growth catalyst for the company.

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The Intelligent Cloud division reported revenue of $25.54 billion for the quarter, marking 19% year-over-year growth. While this is impressive, it came in slightly below Wall Street’s expectation of $25.76 billion. Azure’s constant currency revenue grew by 31%, falling short of the anticipated 32%-33% growth and highlighting a slowdown compared to previous quarters.

Adding to the concerns, Microsoft projected that Azure's revenue growth in the third quarter would range between 31% and 32% in constant currency. This forecast was lower than the Street’s expectation of 33.4% growth. The moderation in Azure’s growth rate raises concerns about the platform’s ability to sustain its momentum, especially in the face of capacity challenges that could hinder its ability to meet rising AI-driven demand.

With this background, let’s take a closer look at Microsoft’s recent financial performance, outlook, and analysts’ consensus rating, which will likely influence the stock's future trajectory.

Should MSFT Investors Worry?

While the slowdown in Microsoft’s Intelligent Cloud segment growth has raised concerns, there are signs that show that the company is poised to deliver solid revenue and earnings in the coming quarters, especially as it expands its AI and cloud services.

AI services are increasingly contributing to Azure’s revenue increase. Of the 31% growth in Azure, 13% came from AI services, which is an encouraging trend.

Azure and other cloud services revenue will likely benefit from the acceleration in AI services, which is growing at a significant pace. For instance, AI services grew 157% year-over-year in Q2 and was ahead of expectations. Looking ahead, the contribution from its AI services will grow as increased AI capacity comes online. While the company has projected that it may face some capacity constraints in the near term, it plans significant investments to address demand. By the end of fiscal year 2025, Microsoft expects to have the capacity to meet near-term demand, which should lead to higher revenues as these investments pay off.

The company’s AI business surpassed an annual revenue run rate of $13 billion, up 175% year-over-year. This growth is likely to continue, especially as Microsoft expands its data center capacity. Over the past three years, the company has more than doubled its overall data center capacity, creating a more efficient system that can handle cloud and AI workloads. This expanded infrastructure will be crucial as AI demand continues to surge.

Another promising aspect of Microsoft’s growth strategy is Microsoft 365 Copilot, which has seen strong customer adoption. Many customers are expanding their use of the platform, with the company’s management noting that those who bought Copilot in its first quarter have collectively increased their seats by more than 10 times over the past 18 months. This shows how Microsoft’s AI-powered productivity tools resonate with businesses and create solid demand.

Additionally, Microsoft’s shift toward higher-margin businesses, such as AI and cloud, combined with strong performance in gaming and search, positions the company well to deliver solid profitability even as it continues to scale its AI infrastructure.

In conclusion, while there are concerns about short-term growth in certain segments, Microsoft’s investments in AI, cloud, and its data center capacity positions it well for solid growth in the long term. Microsoft could continue to generate strong profitability and deliver value to investors.

The Bottom Line on Microsoft Stock

Despite concerns around the moderation in Azure’s growth rate, Wall Street remains optimistic about Microsoft’s long-term potential. Analysts continue to endorse MSFT stock due to the company’s dominant position in the cloud space, its investments in AI, and its diversified revenue streams. All these factors position it well to deliver solid growth in the long run.

Wall Street has a “Strong Buy” consensus rating on MSFT stock. Further, analysts’ average price target of $510.32 implies 15.4% upside potential over the next 12 months.