With its most recent quarterly results, Microsoft Corp. exceeded expectations, resulting in the strongest post-earnings move for the stock in almost ten years.
The third-quarter report from Microsoft (MSFT) has “every element needed to dissipate various concerns,” according to Mark Moerdler, an analyst at Bernstein.
The most obvious win was perhaps Microsoft’s growth in Azure cloud computing, which at 35% in constant currency greatly surpassed forecasts and represented an acceleration from 31% in the previous quarter. The Azure instruction from Microsoft was also impressive.
However, there were also other positive indicators. “While Azure AI continues to be an increasing percentage of Azure revenue,” observed Moerdler, “non-AI Azure growth stabilized due to acceleration in cloud migrations,” accounting for 16 percentage points of increase in the March quarter.
In the meantime, Microsoft’s capital expenditures grew moderately, and the company’s generative artificial intelligence assistant, Copilot, for products like GitHub and Microsoft 365, showed financial momentum, according to management.
Executives noted that Copilot’s transaction volumes are increasing and that more clients are opting to grant more personnel access to the capabilities.
According to Moerdler, “We like the setup for the stock,” “Microsoft previously proved they can drive a valuable cloud business, and now they are showing that they can drive both the cloud and the largest AI business, via a combination of high quality gen AI inferencing and gen AI apps.”
On Thursday, Microsoft’s shares jumped 7.6%. According to Dow Jones Market Data, that was its highest post-earnings performance since it increased 10.1% after its September quarter 2015 report.
Ben Reitzes, an analyst at Melius Research, also highlighted how much of a nice surprise Microsoft provided. “Going into this print, nobody was talking about Azure accelerating to 35% constant-currency growth (from 31%) and guiding the next quarter for 34-35%,” he stated. “Not to mention, nobody thought they’d say they will be capacity constrained in the June quarter – given reports around mythical cuts.”
He pointed out that although currency fluctuations used to hinder Microsoft’s expansion, they may now work to its advantage since the value of the dollar has declined. Microsoft is still increasing its total income at a mid-teens rate when currency fluctuations are taken into account, and “that is really sensational vs. other software giants.”
“Even with tariff uncertainty, there is so much recurring revenue, and now, with cloud acceleration, [Microsoft] really warrants a premium vs. challenged [software-as-a-service] players,” Reitzes stated.
Kirk Materne of Evercore ISI concurred, saying that Microsoft’s earnings “should help flip sentiment in a more positive direction” following four quarters in which the company’s stock was “twisting in the wind.”
“Clearly, the macro environment remains a wild card, but with Azure back in ‘beat/raise’ mode, we believe that overhang now turns into a tailwind and highlights not only the significant demand for AI services on Azure, but also [Microsoft’s] broad base of infrastructure offerings to support the ongoing migration of enterprise workloads to the cloud,” Materne said.
Many on Wall Street may have anticipated that the economic climate would exert some pressure on Azure’s non-AI division, but he pointed out that this division appears stable.
