Microsoft Earnings Preview: Cloud Power and AI Ambitions Take Center Stage. Should You Buy the Stock on the Dip Ahead of Earnings?

With a market valuation of $2.88 trillion, $Microsoft(MSFT)$   stands as one of the most significant and influential technology giants globally. The company is set to release its fiscal year 2025 third-quarter financial results after the market closes on Wednesday, April 30, 2025.

Analysts expect Microsoft to report revenue of $68.44 billion, reflecting a 10.63% increase from the previous year, and earnings per share of $3.22, representing a 9.39% growth. Driven by advancements in artificial intelligence and cloud computing—key forces in today's economic landscape—Microsoft's growth narrative remains compelling.

How Was Past Performance?

On January 29, Microsoft announced second-quarter results that surpassed Wall Street expectations, with a 12% revenue boost driven by the Intelligent Cloud and Productivity and Business Processes segments, particularly Azure and Microsoft 365 Commercial cloud. Despite these strong results, shares dropped 6.2% in after-hours trading due to soft guidance and Cloud performance not meeting analyst expectations. Investor sentiment was further affected by unexpected "other expenses," including an impairment charge from its investment in Cruise.

Currently, Microsoft's stock is down 16.68% from its all-time high, prompting investors to wonder if it will rebound after the upcoming earnings release. Is now the right time to buy the dip before the report?

What to Expect in FY25 Q3?

Investors will be paying close attention to the following key drivers:

Cloud Service Growth

Microsoft's Intelligent Cloud segment continues to be a major focus for investors. In the second quarter of 2025, this segment reported revenue of $25.54 billion, marking a 19% increase. At the center of this growth is Azure, renowned for its advanced data centers and partnerships with leading chip suppliers like Nvidia.

Azure provides businesses with the computing power needed for AI software development and access to pre-built large language models from providers such as OpenAI. It consistently ranks among the fastest-growing areas of Microsoft's business. In Q2, Azure AI revenue soared by 157% year-over-year, contributing 13 percentage points to Azure's overall 31% revenue growth.

Investors will be paying close attention to Azure performance, particularly its growth trajectory driven by AI demand. Deutsche Bank analysts suggest that Microsoft needs to deliver strong Azure performance and guidance to meet high investor expectations, as any slowdown could raise concerns. Additionally, investors will be looking for Azure's performance relative to competitors like Amazon Web Services and Google Cloud.

AI Development

Microsoft's substantial AI investments, including Microsoft 365 Copilot and Azure OpenAI Service, are closely examined. Since 2016, Microsoft has invested around $14 billion in OpenAI, the creator of ChatGPT. Utilizing OpenAI's models, Microsoft developed Copilot, an AI assistant integrated into Windows, Bing, and Edge, and offered as a paid add-on for Microsoft 365. With over 400 million global licenses, the $30-per-month add-on could become a multibillion-dollar recurring revenue stream.

Copilot is significantly boosting revenue in the M365 commercial cloud. Microsoft is actively updating Copilot to drive further adoption and increase revenue. In fiscal Q2 2025, Copilot usage increased by 60% compared to the previous quarter, and early adopters expanded their licenses tenfold over 18 months.

Investors are eager to see these investments drive significant revenue growth, while remaining cautious of competition from more affordable AI models like DeepSeek, which could affect demand for premium infrastructure and profit margins. In response, Microsoft has announced support for DeepSeek's R1 model across its Azure cloud platform, Copilot+ PC, and GitHub services. Investors are particularly interested in how this integration might mitigate potential risks.

Capital Expenditures

Microsoft is set to invest over $80 billion in AI data center infrastructure and chips by fiscal 2025, continuing its substantial commitment to AI and cloud infrastructure. Capital expenditures for Q3 are projected to be in line with Q2 levels. In the short term, however, the delay between these upfront investments and the resulting incremental revenue could negatively impact Microsoft's performance.

Management has indicated that by fiscal 2026, capital expenditure growth will slow, with a focus on short-lived assets that are more directly tied to revenue. Investors are eager for clarity on when these investments will begin to yield returns, particularly given recent stock underperformance linked to significant AI spending.

Tariff Impact

Microsoft's software-centric portfolio faces minimal direct tariff exposure compared to companies dealing in physical goods. With around 75% of its net sales derived from enterprise software and cloud services, Microsoft is less susceptible to tariffs than many other major tech firms.

However, analysts highlight that tariff-related challenges add complexity to the supply chain landscape. The ongoing tariff disputes are causing short-term disruptions, especially for companies with supply chains connected to China. Additionally, tariffs and trade policies could contribute to a broader economic slowdown, with JPMorgan estimating a 60% likelihood of a global recession. If tariffs heighten global economic uncertainty, they could affect business confidence and investment decisions, potentially leading to delays or reductions in cloud and software subscription spending, indirectly impacting Microsoft's revenue.

As of April 24, 2025, analysts maintain a generally positive outlook on Microsoft. They point to Azure's leadership in the transition to public cloud computing and the growth of Microsoft 365, driven by demand for enhanced security features and Teams Phone. Microsoft's strong positions in operating systems and Office generate substantial revenue that supports Azure's further expansion. Additionally, robust commercial bookings and recent successes with OpenAI could enable Microsoft's cloud unit to meet or slightly exceed the expected 30.5% growth in constant currency for fiscal Q3. These factors also help mitigate potential weaknesses in areas more vulnerable to economic slowdowns.

Microsoft is currently trading at a 31x PE ratio. While this isn't considered cheap, it reflects the company's consistent performance and diverse business operations. Although some analysts view this valuation as high, they consider it justified due to Microsoft's unmatched scale, resilience, and the favorable long-term trends the company is poised to benefit from.

What is the Post-Earnings Outlook?

Microsoft's stock often experiences volatility following earnings announcements, with past quarters showing a mix of positive and negative surprises. The implied volatility for options expiring around the earnings date of April 30, 2025, indicates that the market anticipates a potential stock price movement of approximately ±5.15% post-earnings. In comparison, the average post-earnings stock price movement over the previous four quarters was ±3.8%, indicating that the current option values may be overestimated.

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