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Azure

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Cloud

Microsoft’s latest financial report wasn’t exactly a cause for celebration. The company posted better-than-expected fiscal first-quarter earnings, with $3.30 per share on revenue of $65.59 billion. It beat Wall Street’s forecast of $3.10 per share and $64.51 billion in revenue, according to LSEG.
Revenue jumped 16% year over year, and net income rose by 11%. However, while those sound positive, Microsoft is already projecting a revenue drop for the next quarter, putting its estimate between $68.1 billion and $69.1 billion.
Analysts, on the other hand, had expected $69.83 billion, a difference that threw Wall Street off a bit, with shares slipping nearly 4% in premarket trading.
But big names on the Street – JPMorgan, Bank of America, and Morgan Stanley – aren’t ready to cut Microsoft loose. The stock has already seen a 15% rise this year.
Their verdict? Microsoft’s still a “buy.” The company’s moves in AI and cloud services seem to carry enough weight for analysts to ignore the earnings forecast.
<h3 id="span-style-font-weight-400-demand-stays-solid-but-supply-challenges-persist-span">Demand stays solid, but supply challenges persist</h3>
In fact, many expect Microsoft to lead in enterprise AI, despite this revenue blip. Citi, Barclays, and Bernstein still put it on a pedestal. Here’s a quick look at their ratings:-
<ul>
 <li style="font-weight: 400;">Bank of America: Reiterates “buy” with a $510 price target, predicting a 17.9% upside.</li>
 <li style="font-weight: 400;">Barclays: Sticks with “overweight” and a $475 price target, implying a 9.8% increase.</li>
 <li style="font-weight: 400;">Bernstein: Raises target to $511 with “outperform” status, expecting an 18.1% upside.</li>
 <li style="font-weight: 400;">Citi: Remains bullish with a $497 target, projecting a 14.9% increase.</li>
 <li style="font-weight: 400;">Evercore ISI: Reiterates “outperform” with a $500 target, aiming for a 15.6% rise.</li>
 <li style="font-weight: 400;">JPMorgan: Drops target to $465 but maintains “overweight,” indicating a 7.5% increase.</li>
 <li style="font-weight: 400;">Morgan Stanley: Raises target to $548, expecting a 26.7% climb.</li>
 <li style="font-weight: 400;">Wells Fargo: Reaffirms “overweight” with a $515 target, seeing a 19.1% upside.</li>
</ul>
Analysts like Morgan Stanley’s Keith Weiss say Microsoft’s demand for AI services looks solid. He noted in his report that supply limitations are still holding back Microsoft’s generative AI business, especially for its GenAI products.
However, Weiss believes the supply issue is temporary, saying that, “with management confident in a 2H capacity ramp and MSFT trading at 25X CY26 GAAP P/E, investors should see rewards for waiting.”
Analyst Raimo Lenschow commented on Azure’s projected growth rate, pegged at 31-32%, which he considers low but says is only temporary.
“Investors need to have faith that the ongoing high Capex investments (~$20bn including leases in Q1) will turn into meaningful revenue in the future,” he added. So yes, Wall Street is still banking on Microsoft’s AI investments, big time.
<h3 id="span-style-font-weight-400-record-spending-data-center-challenges-and-ai-investment-gambles-span">Record spending, data center challenges, and AI investment gambles</h3>
Now, about that spending – Microsoft’s expenditure on data centers and related AI infrastructure has reached record levels. In Q1 alone, Microsoft’s capital expenditures hit a whopping $14.9 billion, a 50% jump from last year.
The company has never seen spending like this before 2020. Amy Hood, Microsoft’s CFO, emphasized that a big chunk of this cash is meant to support the company’s AI initiatives, even though it is impacting current margins.
For Hood, the investment is a balancing act. Data center supply for Azure is falling short, impacting current revenue. “We are in short supply,” she said, “and so we remain focused on getting that into a more balanced position.” 
Extended trading saw Microsoft’s shares drop nearly 4% after her comments.
Not everyone’s sold on Microsoft’s approach, though. Gil Luria from D.A. Davidson cut his rating to “neutral,” pointing out concerns about the financial drag caused by data center spending. “The more they throw into data center buildout, the more the drag is going to be on margins,” Luria stated.
While Microsoft has managed to save on other costs to keep margins up for now, analysts like Luria aren’t fully confident this will continue without hurting profitability.
Microsoft’s AI projects with OpenAI also weigh on its expenses. The company has invested over $13.75 billion in OpenAI, and it will face a reported $1.5 billion loss from this stake next quarter, according to Hood.
But as OpenAI’s largest shareholder, Microsoft remains committed, seeing AI as the primary growth engine. CEO Satya Nadella has restructured product lines around AI models from OpenAI and is focused on capturing corporate clients for its AI-powered tools.
His goal? To ensure Microsoft’s AI and cloud services dominate the corporate scene for the long term, even as rivals like Google and Amazon jump in.
<h3 id="span-style-font-weight-400-microsoft-office-upgrades-and-a-stronger-bing-span">Microsoft Office upgrades and a stronger Bing</h3>
Microsoft’s AI revenue streams largely come from two areas: Azure cloud services and productivity software like Office, upgraded with AI. Features in Office’s AI suite allow users to summarize emails, transcribe meetings, and design presentations faster.
Microsoft said that AI alone accounted for 12% of Azure’s first-quarter growth, up from 11% last quarter, which Hood emphasized in recent analyst calls. The company’s goal is to reach over $10 billion in annual AI revenue by next quarter, a benchmark that Microsoft’s leadership considers realistic as more companies opt for AI-powered solutions in Azure.
The cloud segment, which includes Office and Azure, has been a powerhouse for Microsoft, growing by 22% to $38.9 billion in the last quarter. Many corporate clients are already paying for Microsoft’s AI features in Office, which come with a price tag of $30 per user, per month.
Although adoption has been cautious, particularly since AI tools are relatively new, revenue per user has been climbing, according to Hood. This growth is also driven by E5, a high-end Office suite that’s become increasingly popular among enterprises.
Microsoft’s Bing search engine is also seeing gains with AI, experiencing a 19% surge in search ad revenue (excluding currency effects). With AI functionalities built into Bing, users are growing, and advertisers are willing to pay more.
These AI updates for Bing came right after Alphabet’s report, which showed Google Cloud sales jumping 35% to $11.4 billion. Amazon, the biggest player in cloud services, has yet to report, but Microsoft’s cloud growth aligns closely with its competitors, despite its Q1 revenue miss.

‘Buy the dip’ – Microsoft’s AI vision is still a winner on Wall Street

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