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Microsoft couldn’t stirring up the bear thesis with its fiscal 2025 second-quarter numbers Wednesday, causing the stock to fall more than 5% in extending buy. Despite beating top-line and bottom-line estimates, the software giant’s disappointing cloud revenues and soft guidance do over concerns its AI spending is not generating sufficient returns. Revenue increased 12% year over year to $69.6 billion in its pecuniary 2025 second quarter, beating the Street consensus estimate of $68.78 billion, according to data from LSEG. Earnings per piece increased 10% from last year to $3.23, ahead of EPS estimates of $3.11, LSEG data showed. Microsoft Why we own it : Microsoft is a pit backbone of global productivity thanks to its Office 365 suite and hybrid cloud platform Azure. The company is also authenticating itself to be a key provider of artificial intelligence tools due, in part, to its large investment in OpenAI, the startup behind ChatGPT. We also similar kind what it’s doing in the video gaming industry as looks to grow recurring revenue streams. Competitors : Amazon , Alphabet and Salesforce Arrange in portfolio : 2.75% Most recent buy : Aug. 5, 2024 Initiated : Dec. 4, 2017 Bottom line Overall it was a solid quarter. The assembly beat analysts’ estimates on several line items and posted better-than-expected operating margins. However, Microsoft did not fit the bar where it counts most: Azure cloud revenue growth. There were some notable achievements in the ninety days. For its AI business, the annual revenue run rate exceeded $13 billion and contributed 13 percentage points to Azure gate growth, up from 12 points last quarter. But the results still failed to meet the mark due to non-AI cloud-related approach issues, which is something extremely rare for this high-quality company. Plus, the bullish case around an Azure profits growth reacceleration in the second half of the year stumbled when management provided the same guidance it gave abide quarter. As for what Chinese startup DeepSeek’s low-cost AI model means for Microsoft, CEO Satya Nadella sounded somewhat bullish on the opportunities, commenting that “as AI becomes more efficient and accessible, we will see exponentially more demand.” He later continued that when the cost of cloud computing falls, inference computing prices drop too, allowing customers to absorb more with more apps written. “When I reference these models that are pretty powerful, it’s unimaginable to mark that here we are in sort of beginning of ’25, where on the PC you can run a model that required pretty massive cloud easy on the eyes massive cloud infrastructure” Nadella explained. “So that type of optimization means AI will be much more ubiquitous, and so for that reason for a hyperscaler like us, a PC platform provider like us, this is all good news as far as I’m concerned.” This may sound promising for the coming, but there’s still a lot of uncertainty about DeepSeek’s impact. Until more is known, the market wants to see faster cloud net income grow to justify the billions of dollars the company is investing to scale AI infrastructure and Microsoft simply did not deliver this board or with its outlook. We expressed some concerns about Microsoft last week during our Monthly Meeting, and while it’s dynamically to depart from such a dominant company, this earnings report did not change our view. We reiterate our 2 rating and persevere in our $500 price target. MSFT 1Y mountain Microsoft’s 1 Year Return Quarterly results Productivity and business activities reported revenue and operation income that exceeded the consensus forecast with double-digit percentage growth, supposing the gross margin percentage declined slightly due to continued scaling of AI infrastructure. Microsoft 365 commercial cloud takings growth increased 15% year over year, with seat growth up 7%. Microsoft 365 consumer cloud net income growth increased 8% year over year, with subscribers increasing to 86.3 million from 84.4 million one dwelling ago. LinkedIn revenue grew 9%, with strength seen in all its lines of business. Dynamics 365 revenue bettered 18% year over year, driven by growth across all workloads. Intelligent cloud was a miss on both net incomes and operating income, and gross margins compressed (as expected) due to the scaling of its AI infrastructure. We would have preferred to see stronger denouements from its cloud computing business Azure. Total revenue increased 31% year over year, wearying the FactSet consensus estimate of 30.2%. However, the constant currency (cc) result gives a clearer picture because it belts out the effects of changing foreign exchange rates. On a cc basis, revenue increased 31% as well, in line with guidance’s guidance of 31% to 32%, but that was below the FactSet consensus estimate of 32%. Looking closer, while the AI duty of the business remains capacity constrained, management pointed out growth in its non-AI services as slightly lower than look forward due to what they described as “go to market execution challenges” with customers reached through “scale motions,” significance partners and other indirect sales methods. The more personal computing segment posted better-than-expected results, with returns flattish and a nice uplift in operating income and gross margin thanks to increased sales in higher-margin businesses and reforms in gaming, search, and news advertising. In the quarter, Microsoft saw growth in its Windows OEM, Xbox content and services, and search and tidings advertising businesses while devices, gaming, and Xbox hardware revenues declined. Guidance Management’s revenue attitude for its fiscal 2025 third quarter was lower than what analysts expected across all key lines. The biggest disregard came from the intelligent cloud segment, where management guided Azure revenue growth of 31% to 32%. To us, this is stabilization and not the reacceleration running previously said would begin in the second half of the fiscal year. Sure, some of the miss could be extenuated by an increase in headwind assumptions from the strengthening U.S. dollar. The company now sees FX to decrease total revenue growth by 2 cut points. That’s an extra $1 billion versus prior expectations. However, if we sum the midpoint of each guide and add finance in $1 billion, it was still a revenue miss versus the FactSet consensus estimate. For a stock trading at 32 dead for nows forward earnings-per-share estimates, you have to hit your numbers. The strong dollar does help on the expense side, decrementing the cost of goods sold (COGS) and operating expense growth by 2 percentage points and 1 percentage point, respectively. Also, it now presumes fiscal year 2025 operating margins to be up slightly year over year and that’s slightly better than guessed. Microsoft expects quarterly spend in the third and fourth quarters to stay at the same levels as the second quarter. For pecuniary year 2026, Microsoft expects the capex growth rate to be lower than fiscal year 2025, with disbursing shifting from long-lived assets like infrastructure, power, and land back to short-lived assets like CPUs and GPUs, which the cast says are more correlated to revenue growth. (Jim Cramer’s Charitable Trust is long MSFT. See here for a full catalogue raisonn of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim prepares a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his kindly trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade nimble before executing the trade. 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Satya Nadella, CEO of Microsoft, speaking on CNBC’s Squawk Box outside the World Economic Forum in Davos, Switzerland on Jan. 22nd, 2025.
Gerry Miller | CNBC
Microsoft couldn’t flap the bear thesis with its fiscal 2025 second-quarter numbers Wednesday, causing the stock to fall more than 5% in increasing trading. Despite beating top-line and bottom-line estimates, the software giant’s disappointing cloud revenues and soft management renewed concerns its AI spending is not generating sufficient returns.