To The Moon

Microsoft Earnings Preview: Can Azure Growth Hit 30% Again?

$Microsoft(MSFT)$   will announce its FY2025 Q4 earnings report after the market closes on July 30. In the last quarter, Microsoft's Azure experienced higher-than-expected growth, leading to a more than 7% increase in stock price on the trading day following the earnings report. The market widely believes it will be difficult for Microsoft to exceed expectations to the same extent as last quarter, but we remain optimistic about its cloud computing business.

Core Financial Indicators

Microsoft's revenue is expected to be USD73.81B for FY2025Q4, up 14.03% YOY;

EPS is estimated to be USD3.38, up 14.47% YOY.

Four Things to Watch:

Productivity & Business Processes Business

Microsoft's Productivity & Business Processes is a relatively stable segment. This segment includes Office 365 Commercial, Consumer editions, as well as businesses such as Dynamics 365 for CRM (Customer Relationship Management), Skype for Business, and Microsoft Teams. Copilot is expected to increase the ARPU (Average Revenue Per User) for Office 365.

As a fundamental part of Microsoft, the revenue growth rate for this segment is expected to remain in the low double-digit percentage.

Intelligent Cloud Business

Microsoft's Intelligent Cloud Business includes server products and cloud services (such as Azure) as well as Enterprise and partner services. Microsoft has guided to a revenue of $28.75-29.05 billion for the Intelligent Cloud (IC) segment, representing a growth of 20-22% in constant currency (also guided to <1 percentage point currency tailwind).

Among these, the market is most focused on the growth rate of the cloud computing service, Azure. Previously released earnings from Google indicated that the demand for cloud computing remains robust, suggesting that Microsoft's cloud services could also exceed expectations. However, the rise in Microsoft's stock price since May has already partially priced in the expected acceleration of cloud computing.

Regarding server products, revenue declined by 6% year-over-year last quarter, and this trend may continue this season. The business could confront a reality check with the release of guidance later this month, due to pressures on non-AI IT expenditures.

More Personal Computing

The revenue growth rate for the More Personal Computing segment is estimated to be in the single-digit percentage. This segment includes Windows OEM licensing and devices, gaming, Microsoft Edge, as well as search and news advertising.

Due to the weakness in the PC market, the revenue of Windows operating systems and devices might continue to be weak this quarter. It is worth mentioning that Microsoft's Bing search engine is gaining more market share, with a 15% revenue increase in the last quarter. However, due to its relatively low base, its contribution to this segment is limited.

Capital Expenditure

The market consensus predicts that Microsoft's capital expenditure (CapEx) for the single quarter will reach a new high of $17.71 billion. Additionally, since this fiscal quarter is Microsoft's FY2025 Q4, Microsoft will also provide capital expenditure guidance for FY2026. The market estimates that there will be $100 billion in capital expenditures next year, with an increased proportion of GPU spending accounting for 60% of total server expenditures.

Option Market Signals

The current Put/Call Ratio for Microsoft is 0.66, which is at the median level. Implied volatility data indicates that Microsoft's volatility is lower than that of other tech stocks, but the stock price has fluctuated by more than 6% in each of the past three earnings seasons.

Summary of Risks and Opportunities

~Potential Positive Catalysts: Azure growth, AI demand

~Risks to Monitor: The risk of excessive CapEx

~Valuation:

Microsoft's PE ratio is 39.48 times, which is at the 99th percentile of its historical range over the past five years.

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