Key points
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Microsoft beat earnings and revenue estimates in its fiscal Q1.
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The stock was falling as revenue estimates for Q2 fell short of expectations.
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Should investors view this as a buying opportunity?
Microsoft delivered solid earnings, but its stock price was still dropping. Is this a buying opportunity?
Microsoft (NASDAQ:MSFT) stock was falling on Thursday, down around 6% despite reporting solid results in its fiscal 2025 first quarter.
The tech behemoth topped estimates, hauling in $66 billion in revenue in the quarter, a 16% increase. That was better than the $64.5 billion that the street had anticipated.
Net income rose 11% to $24.7 billion, or $3.30 per share. That was significantly better than the $3.10 that had been expected by Wall Street analysts.
While the Q1 numbers were strong, the guidance for the December quarter fell short of expectations, likely sparking the selloff.
It has been a challenging year for Microsoft stock as it has underperformed with a year-to-date return of about 8%. Should investors view this as a buying opportunity?
AI drives revenue
The cloud continues to drive Microsoft’s earnings, as overall cloud revenue increased 22% to $38.9 billion, representing about 59% of total revenue.
Its Intelligent Cloud business generated $24.1 billion in revenue, up 20% year-over-year. Within this segment, Microsoft Azure, its enterprise cloud service, which deploys generative AI models at data centers, saw revenue increase 33%.
In addition, the Microsoft 365 Commercial cloud product saw revenue grow 15%, while Microsoft 365 Consumer cloud revenue rose 6%.
The growth in the cloud businesses has been fueled by its AI capabilities, said CEO Satya Nadella on the earnings call.
“AI-driven transformation is changing work, work artifacts, and workflow across every role, function, and business process, helping customers drive new growth and operating leverage,” Nadella said. “All-up, our AI business is on track to surpass an annual revenue run rate of $10 billion next quarter, which will make it the fastest business in our history to reach this milestone.”
Also of note, Xbox content and services reported a 61% revenue increase, driven by the acquisition of Activision last year. In addition, Microsoft search and news advertising revenue rose 18%, excluding traffic acquisition costs.
However, its cost of revenue rose 23% year over year to $20.1 billion, and its overall gross margin fell to 69%, from 70% the previous quarter. But its cloud gross margin ticked up to 71%, from 70% in the previous quarter.
Outlook disappoints
Microsoft stock was likely trending lower Thursday on it fiscal Q2 outlook. The company called for between $68.1 billion to $69.1 billion across its three main businesses, which would be up 5% over the previous quarter at the midpoint and almost 11% year-over-year. However, analysts had been anticipating $69.8 billion in revenue.
Within the Intelligent Cloud business, Microsoft anticipates $25.55 to $25.85 billion in revenue in Q2, which would b an 18% to 20% year-over-year jump. Growth will be driven by Azure, which is projected to see 31% to 32% growth, even accounting for some external capacity constraints due to high demand.
“We expect the contribution from AI services to be similar to last quarter given the continued capacity constraints, as well as some capacity that shifted out of Q2,” Nadella said on the call. “And in H2, we still expect Azure growth to accelerate from H1 as our capital investments create an increase in available AI capacity to serve more of the growing demand.”
These are good problems to have for Microsoft, as demand remains high with commercial bookings growing 30% in Q1, up from 17% the previous quarter.
Is Microsoft stock a buy?
Microsoft earnings and outlook got a mixed reaction from analysts. Several lowered their price targets slightly, but Morgan Stanley bumped it up $42 to $548 per share, which would be up 34% from the current $408 per share price.
The consensus among analysts sets a $497 per share target, which would be up 21% from the current price.
Analysts at Evercore called today’s sell-off a buying opportunity and I cannot disagree with that. The issues that led to the selloff today are just short-term in nature. Microsoft still remains well-positioned to grow long-term due to its strength in cloud computing and AI. It also has a fairly reasonable valuation, compared to other big tech competitors.
Whenever a great company like Microsoft sees a dip like this, it’s worth paying attention. And in this case, the dip is not due to a major long-term concern, so investors should view this as an opportunity.
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