While Microsoft’s Q1 2025 revenue hit $65.59 billion, its cloud segment missed projections. AI investments show promise, with CEO Nadella projecting $10 billion in annual AI revenue next quarter.
Microsoft held an earnings call after the bell on October 30. As the company missed the analysts’ expectations in the cloud segment, the shares fell almost 4% on the premarket.
Microsoft Earnings Breakdown
Microsoft (MSFT) reported fiscal first-quarter earnings that exceeded Wall Street forecasts, though its cloud revenue growth fell slightly short of projections.
The company’s quarterly revenue grew 16% year-over-year, reaching $65.59 billion, while net income rose to $24.67 billion or $3.30 per share, surpassing analysts’ expectations. However, Microsoft’s Intelligent Cloud segment, encompassing its Azure cloud platform, brought in $24.09 billion, a 20% increase year-over-year but still below analysts’ estimates of $28.97 billion.
Guide Disappoints – Microsoft $MSFT Earnings Recap
Updating the table for non-cash capex, guidance, and re-segmentation adjustments for correct Y/Y segment comparisons.
Revenue guide disappoints, primarily in Personal Comput.
Stock now -3%. https://t.co/eIiroPO5J4 pic.twitter.com/IpGbCXz3TC
— CG (@ConsensusGurus) October 30, 2024
AI Investments Drive Revenue
As big tech faces mounting pressure to demonstrate returns on AI investments, Microsoft CEO Satya Nadella highlighted the rapid growth of the company’s AI-driven revenue streams, particularly in Azure and Microsoft 365.
Nadella projected that Microsoft’s AI business will reach a $10 billion annual revenue run rate by next quarter, making it the company’s fastest-growing sector to hit this milestone. This surge is largely attributed to demand for Microsoft 365 Copilot, now used by 70% of Fortune 500 companies.
OpenAI Losses Loom
Despite AI’s promise, Microsoft’s investment in OpenAI has introduced challenges. According to CFO Amy Hood, Microsoft expects a $1.5 billion revenue shortfall this quarter, primarily due to OpenAI’s financial losses. Microsoft has invested nearly $14 billion in OpenAI, which is projected to lose $5 billion this year, partially offset by revenues of $4 billion.
While OpenAI remains central to Microsoft’s AI strategy, the company is expanding AI partnerships to mitigate reliance on a single model. Microsoft’s GitHub recently announced it would allow developers to utilize models from Google and Anthropic for its Copilot Chat feature, providing more options beyond OpenAI’s GPT-4. This strategic diversification underscores Microsoft’s commitment to maintaining momentum in the AI landscape while managing potential financial risks.
Is Microsoft Stock a Buy?
Microsoft stock has rallied 24.5% since the beginning of the year, starting at 376.04 and showing strong upward momentum. However, its relative strength line (RS), which indicates a stock’s performance relative to the S&P 500, has declined, suggesting that while Microsoft has gained, it has not kept pace with the broader market.
The stock’s IBD Composite Rating has improved over recent months, now sitting at 73. However, for top-tier growth stocks, IBD typically looks for a Composite Rating of 95 or higher, a benchmark that historically marks the start of significant rallies. Microsoft’s Relative Strength Rating (RS) also reflects this need for improvement. Currently at 62, the RS rating shows that Microsoft has outperformed 62% of all stocks over the past year. Though an improvement from recent lows, it’s still below the ideal level for breakout stocks, which typically start their runs with an RS Rating of at least 95.
According to IBD research, the biggest stock market winners averaged a Relative Strength Rating of 87 or higher when they began their strong upward trends. This trend indicates that stocks with high relative strength ratings often achieve substantial gains, rewarding investors who recognize and act on those high ratings at the right time.