Microsoft Earnings: Azure and Capital Expenditures Are Expected to Accelerate

Key Morningstar Metrics for Microsoft

• Fair Value Estimate
  : USD 600
• Morningstar Rating
  : ★★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Microsoft’s Earnings

Microsoft MSFT‘s third-quarter results topped the high end of guidance. Revenue increased 15% year over year in constant currency to USD 82.9 billion, compared with the high end of guidance of USD 81.75 billion, while operating margin was 46.3%, compared with the high end of guidance at 46.1%.

Why it matters: Results continue to look good from a variety of facets, as headline numbers came in ahead of our aggressive expectations on both the top and bottom lines. All three segments beat the high end of guidance. Critically, we see strength in Azure, in both traditional and artificial intelligence workloads.

• Near-term demand indicators remain robust. Commercial bookings grew 7% year over year in constant currency, excluding OpenAI, and declined 6%, including OpenAI. Remaining performance obligation was up 99% to USD 627 billion, about 25% of which will be recognized in the next 12 months.
• Demand for Azure AI services is surging, which is a long-term positive. While Azure remains capacity-constrained, both traditional and AI workloads were strong. Azure growth was 39% in constant currency for the quarter and surpassed guidance of 37.5%, versus 84% growth in capital expenditure.

The bottom line: We keep our fair value estimate for wide-moat Microsoft at USD 600 per share as we raise our growth forecast along with an offsetting margin decrease based on more Azure capital expenditures. The stock remains one of our top picks.

Coming up: Fourth-quarter guidance is just shy of FactSet consensus estimates but in line with our model, and includes USD 87.40 billion in revenue, 44.1% operating margin, and USD 4.18 in EPS at the midpoints. The key takeaway is the new plan for USD 190 billion in capex over the next three quarters.

Big picture: We see results as consistent with our long-term thesis, which centers on the expansion of hybrid cloud environments, the proliferation of AI, and Azure. We center our growth estimates around Azure, Microsoft 365 E5 migration, and traction with the Power Platform.