To The Moon

$Microsoft(MSFT)$

Big news for Microsoft stock investors! The company's management has shared some important updates on its business progress, and I'm here to break them down for you in this article. Let's dive in and explore what these developments could mean for Microsoft's stock performance.

Earning Overview

Microsoft's recent quarterly financial results caused its stock price to drop. In this articles, I’ll walk through the key figures, explain why the stock is falling, and share whether I still consider Microsoft stock a good buy after these results. Let’s get into it.

Overall, Microsoft reported second-quarter revenue of $69.6 billion, a 12% increase year-over-year. The biggest growth came from its Intelligent Cloud business, which saw a 19% increase. The company's gross profit margin was 69%, one of the highest in the world, and operating profit margin reached 45%, totaling operating income of $31.7 billion. Microsoft runs one of the most profitable businesses globally, generating hundreds of billions in revenue with operating margins above 40%.

Additionally, Microsoft reported a remarkable 67% year-over-year growth in commercial bookings and a $40 billion increase in commercial remaining performance obligations, reaching $298 billion. Much of this boost came from OpenAI’s commitment to Microsoft, as OpenAI purchases computing power from Microsoft, benefiting them both.

Now, why is the stock price falling?

It all comes down to the cloud business. Microsoft's cloud revenue was $41 billion, growing 21% year-over-year. While these numbers are solid, the decline in growth rate is the main concern. The growth rate has dropped for several consecutive quarters, from 24% in Q2 2024 to 22% in Q4 2024, and now to 21% in Q2 2025. The growth rate slowing down, coupled with falling margins, is what’s driving the stock down. Specifically, the cloud business's gross margin decreased from 72% to 70%, reflecting Microsoft’s heavy investment in developing AI-optimized data centers. These investments are being sold to companies like OpenAI, but they're impacting margins for now.

As an investor, however, I’d still be optimistic about Microsoft. The company’s investment in AI is clearly paying off, as evidenced by the huge jump in commercial remaining performance obligations—up $40 billion from the previous quarter and $75 billion from the prior year. The rate of growth is accelerating, and this shows strong demand in the AI sector, justifying the ongoing investment.

Good news also came from the Personal Computing segment, with Windows OEM and device revenues rising by 4%, improving from just a 2% increase last quarter and even a -1% drop in the quarter before that. The PC market, which had struggled post-2020 surge, is now rebounding, which is a positive sign for companies in the personal computing space.

Given these results, I expect Intel's upcoming earnings to show slightly better-than-expected figures, though not drastically different from what I anticipated. Overall, while Microsoft's stock price is down due to slowing cloud growth and margin compression, the company's focus on AI and improving personal computing performance suggest long-term growth potential.

OpenAI

First, let's talk about a major recent development: OpenAI has made a substantial commitment to Microsoft’s Azure, which has added billions of dollars to Microsoft’s remaining performance obligations. This is essentially a contract for service, meaning it will eventually convert into revenue for Microsoft. OpenAI’s APIs will be exclusively hosted on Azure, meaning customers will rely on Microsoft to access some of the world’s most advanced AI models. And, according to Microsoft, OpenAI has more exciting things coming soon, so keep an eye out.

Microsoft 365 Co-Pilot

Additionally, Microsoft 365 Co-Pilot, the AI-powered user interface designed to boost employee productivity, is playing a key role in driving the company's growth. Co-Pilot offers users access to a variety of AI tools that streamline workflows, and this will be a major factor in increasing Microsoft’s average revenue per user (ARPU) for Microsoft 365. With millions of users already subscribed to Microsoft 365, which includes popular products like Word, Excel, and PowerPoint, the integration of AI allows Microsoft to raise subscription prices—boosting revenue. This high-margin upgrade could make a very profitable segment even more lucrative for Microsoft in the long run.

The Future Of Microsoft Growth

Speaking of growth, the adoption of Microsoft 365 Co-Pilot is accelerating at an impressive rate. It more than doubled its user base in just two quarters, growing from 4 million to 8 million and then from 8 million to 16 million. This rapid adoption is a strong sign of the value the product is providing—helping users save time and boost productivity. At a price of around $30 a month, it’s no surprise that so many people are willing to pay for it if it delivers such significant time savings. Lastly, Microsoft reminded everyone that Windows 10 is nearing the end of its support, which will likely drive customers to upgrade to Windows 11 devices.

That’s a quick summary of the key updates. It’s clear that Microsoft is on a strong growth trajectory, and these advancements could have a big impact on its stock performance. Stay tuned for more updates!

Microsoft anticipates that most PCs sold in the coming years will be AI-powered, featuring Co-Pilot or similar enhancements. Several factors are driving this predicted increase in personal computer sales over the next 1 to 3 years. Two key reasons are highlighted here:

• First, Microsoft is ending support for Windows 10, which means users with older systems will need to consider upgrading their devices.

• Second, many of the newer PCs will be equipped with artificial intelligence features, which will attract buyers looking for the latest AI capabilities.

• A third, unmentioned factor is the wave of PC purchases made back in 2020 when the pandemic first hit. That surge in demand was driven by the shift to remote work and learning. Fast forward to 2025, and those computers are now approaching 5 years old, with the average lifespan of a personal computer being 4 to 6 years. Many people who bought PCs in 2020 will soon be looking for upgrades or replacements. This replacement cycle is further fueled by the fact that Microsoft is ending support for Windows 10, and the new AI-enhanced features in upcoming PCs will likely encourage even more people to upgrade rather than hold onto their older devices for longer.

Fundamental Analysis

In its latest quarter, Microsoft saw a 12% increase in revenue, reaching $69.6 billion, while gross margin rose by 13%. While these numbers might seem strong, the increase in gross margin of just 13%—despite a 12% rise in revenue—is somewhat lower than usual for Microsoft. The company primarily sells services and software, and typically has better operating margins and leverage. However, in recent quarters, this has been impacted by their significant investments in artificial intelligence. These AI investments have reduced the operating leverage, but Microsoft expects that to improve over time.

Operating income, however, grew by 17.7% on a 12% revenue increase. Typically, you'd expect operating income to rise by more than 20% with that level of revenue growth. Microsoft attributes these results to strong demand for their cloud and AI offerings, and it's worth noting that their AI business has grown by over 100% compared to the same time last year. This explains why the company is investing heavily in that sector.

Market Sentiment

As I mentioned earlier, investors were disappointed by the decelerating growth rate in Microsoft’s most important segment, along with the declining profit margins in that area. As a result, the company's forward price-to-earnings (P/E) ratio has dropped to 27.7, which is the lowest it's been all year.

Valuation

Additionally, my discounted cash flow (DCF) valuation suggests Microsoft’s intrinsic value per share is $447, while the current market price is $415. Based on this, I would say that Microsoft is slightly undervalued, or at the very least, fairly valued with an appropriate margin of safety. So, looking at these numbers, Microsoft is trading at the lower end of its P/E range for the past year, and its market price is below my calculated intrinsic value.

On top of that, Microsoft remains an exceptional business. When I see a great company like this at a fair price, I’m happy to consider it an investment opportunity. I don’t expect to find top-tier businesses like Microsoft at discount prices often, so getting it at a fair price is an appealing prospect for long-term investors.

Conclusion

If you're keeping an eye on Microsoft stock and looking for the latest updates, I hope this articles gave you some useful insights. I'll be sharing more content on Microsoft’s earnings results soon—I've already posted a few articles and will continue to do so, since Microsoft plays such a critical role in both the U.S. stock market and the broader AI ecosystem. This trend is a key driver behind the sharp increases in stock valuations over the past couple of years.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub