Microsoft’s strong quarter fails to prevent a share-price decline: analysis and MSFT stock forecast for 2025

Microsoft reported a strong quarter, with revenue and earnings surpassing market expectations. However, the company’s sharp ramp-up in AI infrastructure investments and factors related to its partnership with OpenAI raised investor concerns, leading to a decline in MSFT shares.

Microsoft Corporation (NASDAQ: MSFT) reported robust results for Q1 of fiscal year 2026. Revenue reached 77.7 billion USD (+18% y/y), operating profit rose to 38 billion USD (+24%), and adjusted net income totalled 30.8 billion USD, or 4.13 USD per share – well above analyst expectations (the consensus forecast was 75.4 billion USD in revenue and EPS of about 3.67 USD). The main growth driver was the cloud segment, particularly the Azure service, which delivered exceptionally strong momentum.

Microsoft Cloud generated 49.1 billion USD in revenue, while remaining performance obligations (RPO) increased by 51% to 392 billion USD. This indicates a substantial backlog of future revenue, supporting the company’s continued expansion of AI-related infrastructure.

Capital expenditure surged to 35 billion USD in the previous quarter (+75% y/y), primarily directed towards building data centres and acquiring GPUs for AI workloads. These expenses slightly compressed the gross margin. Nevertheless, Microsoft continues to maintain robust cash flow and a large cash reserve, enabling it to finance investments without jeopardising financial stability.

The outlook for Q2 2026 also appears solid: the company expects revenue of 79.5–80.6 billion USD (+14–16% y/y), stable operating margins, and a Microsoft Cloud gross margin of around 66%.

Investor reaction to Microsoft’s Q1 FY2026 report was negative despite the strong top- and bottom-line performance. On the first trading day, the stock fell by around 2.9%, and the decline continued over the following sessions.

The main reason was a shift in focus from strong results to the scale of AI investments. The company disclosed record quarterly capital expenditure of roughly 35 billion USD and warned that spending on data centres and GPUs would continue to rise. This raised concerns, as AI-infrastructure costs are already squeezing the profitability of the cloud business, while future growth is becoming increasingly dependent on this capital-intensive area.

Additional pressure on MSFT shares came from losses associated with OpenAI and the stock’s high valuation before the earnings release – investors had been pricing in near-perfect results. As a result, the market viewed the report as strong in numbers but burdened by an overly aggressive investment plan, which ultimately triggered a decline in the share price.

This article examines Microsoft Corporation and its business operations, providing a fundamental analysis of Microsoft’s reports, along with a technical analysis of MSFT shares, forming the basis for the Microsoft stock forecast for 2025.

About Microsoft Corporation

Microsoft Corporation is one of the world’s largest technology companies, specialising in software development, computer hardware, cloud services, and other technologies. The company was founded on 4 April 1975 by Bill Gates and Paul Allen. Microsoft is renowned for its flagship products, including the Windows operating system, the Microsoft Office suite, the Bing search engine, the Azure cloud platform, Xbox gaming consoles, and various other innovations. It is actively expanding its initiatives in artificial intelligence, corporate solutions, and software development. Microsoft’s initial public offering (IPO) occurred on 13 March 1986, when its shares were listed on the NASDAQ stock exchange under the MSFT ticker. Today, Microsoft holds a leading position in the global technology industry.

Images of the Microsoft Corporation name

Microsoft Corporation’s key revenue streams

Microsoft’s revenue comes from three core business segments – Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. Each of these is described below:

Productivity and Business Processes: products and services designed to enhance productivity and business processes. This segment includes the following products:

Microsoft Office (Office 365 and Microsoft 365) – software suites aimed at improving productivity and optimising business processes.

LinkedIn – a professional networking platform.

Dynamics 365 – cloud-based and on-premises business management solutions, including ERP (Enterprise Resource Planning) and CRM (Customer Relationship Management).

The primary clients of this segment include corporate users, small businesses, and individuals.

Intelligent Cloud: cloud-based platforms and infrastructure for developing corporate solutions, including:

Microsoft Azure – one of the world’s largest cloud-based platforms, providing data storage, artificial intelligence, analytics, and app development services.

Server products and licences – Windows Server, SQL Server, Visual Studio, and System Center.

Support and consulting services – technical support, training, and customisation of cloud and server solutions.

This segment focuses on companies developing complex systems and apps based on cloud computing.

More Personal Computing: products and services aimed at individual users and personal devices, including:

Windows – an operating system that forms the basis for managing computer hardware and software resources.

Devices – the Surface line-up (laptops, tablets, hybrid devices) and accessories.

Gaming business – Xbox consoles, Xbox Game Pass subscriptions, sales of games and accessories, and revenues from cloud gaming.

Advertising – revenues from the Bing search engine and advertising on other Microsoft platforms.

This segment is targeted at end users and original equipment manufacturers (OEMs).

Microsoft Corporation Q1 2025 financial results

Microsoft released its Q1 fiscal 2025 report on 30 October 2024. Below are the key figures:

Revenue: 65.6 billion USD (+16%)
Net income: 24.7 billion USD (+10%)
Earnings per share: 3.3 USD (+10%)
Operating profit: 30.6 billion USD (+13%)

Revenue by segment:

Productivity and Business Processes: 28.3 billion USD (+12%)
Intelligent Cloud: 24.1 billion USD (+20%)
More Personal Computing: 13.2 billion USD (+16%)

Microsoft’s management expressed a positive outlook on the Q1 fiscal 2025 results. Chairman and CEO Satya Nadella highlighted the company’s focus on AI transformation and its impact on business operations and workflows. Overall, AI revenue is on track to exceed 10.0 billion USD in annual revenue next quarter, marking the fastest growth in Microsoft’s history. He also noted that the company continues to expand its capabilities and attract new clients, enabling them to leverage AI platforms and tools for business development.

Looking ahead to Q2 fiscal 2025, Microsoft projected the trends observed in the previous quarter to continue. Robust growth was expected from commercial clients driven by long-term contracts, alongside a projected increase in capital expenditure on AI.

Microsoft Corporation Q2 2025 financial results

On 29 January 2025, Microsoft released its Q2 2025 financial results. The key figures are as follows:

Revenue: 69.6 billion USD (+12%)
Net income: 24.1 billion USD (+10%)
Earnings per share: 3.2 USD (+10%)
Operating profit: 31.7 billion USD (+17%)

Revenue by segment:

Productivity and Business Processes: 29.3 billion USD (+14%)
Intelligent Cloud: 25.5 billion USD (+19%)
More Personal Computing: 14.6 billion USD (unchanged)

Investors were particularly interested in Microsoft’s response to the rapid rise of DeepSeek. In his remarks, CEO Satya Nadella addressed the impact of DeepSeek’s recent AI achievements. He stated that while its developments are noteworthy, Microsoft remains committed to developing comprehensive AI solutions that integrate with its existing cloud and enterprise services seamlessly. He highlighted the company’s extensive infrastructure and ecosystem, which enable it to meet the growing demand for AI applications while ensuring scalability and reliability for clients worldwide.

CFO Amy Hood provided further details on Microsoft’s financial strategies amid the evolving AI landscape. She explained that the company’s capital expenditure was strategically justified and directed towards AI-driven data centres to support model training and the global deployment of cloud-based AI applications. Hood acknowledged investor concerns over increasing AI-related expenses but reassured them that stringent cost control and a focus on efficiency would enable Microsoft to expand its operating margin despite higher capital investment in this segment.

Overall, Microsoft’s leadership reaffirmed confidence in its AI strategy, stressing that its comprehensive approach and significant infrastructure investments position the company well to capitalise on the growing demand for AI services, even as competition intensifies.

Investors’ reaction to the earnings report was negative, driven by concerns that Azure’s projected growth fell short of expectations and by a sharp rise in capital expenditure.

Microsoft Corporation Q3 FY 2025 financial results

On 30 April 2025, Microsoft released its Q3 fiscal 2025 report, which ended on 31 March. Below are its highlights compared to the corresponding period in fiscal 2024:

Revenue: 70.1 billion USD (+13%)
Net income: 25.8 billion USD (+18%)
Earnings per share: 3.46 USD (+18%)
Operating profit: 32.0 billion USD (+16%)

Revenue by segment:

Productivity and Business Processes: 29.9 billion USD (+10%)
Intelligent Cloud: 26.8 billion USD (+21%)
More Personal Computing: 13.4 billion USD (+6%)

Microsoft’s Q3 fiscal 2025 report reaffirmed its position as one of the leaders in cloud technologies and AI. The results exceeded market expectations and increased investor interest. The main driver of success was the Azure cloud business, which achieved a 35% year-on-year increase in revenue. Notably, AI services accounted for 16 percentage points of this growth, underscoring the rapid adoption and commercialisation of artificial intelligence within Microsoft’s products.

CEO Satya Nadella stated that the AI business is on track to reach an annualised turnover of 10 billion USD as early as the next quarter, making it the fastest-growing business in the company’s history. Microsoft 365 Copilot, now adopted by approximately 70% of Fortune 500 companies, saw particularly strong momentum. This underscored not only Microsoft’s technological leadership but also its ability to monetise innovation effectively.

The 16% increase in total revenue and 18% rise in profit fuelled a more than 10% surge in Microsoft’s share price following the earnings release, marking one of the strongest post-earnings reactions in the past decade. Investment banks also responded positively: Bank of America and Mizuho raised their price targets to a range of 485-515 USD, highlighting the robust growth prospects and notable potential in generative AI.

For the next quarter, Microsoft expects Azure revenue to rise by 31-32% in constant currency, with AI contributing significantly to this growth. CFO Amy Hood emphasised that growth is expected to accelerate further in the second half of the financial year, driven by increased investments in AI infrastructure.

Overall, Microsoft demonstrated a rare combination of maturity and innovation. The company is successfully scaling its AI solutions while continuing to strengthen its core businesses. For investors, this represents an opportunity to participate in long-term growth with a relatively low level of risk, especially amid the global shift towards digital and intelligent solutions.

Nonetheless, there are risks to consider. Firstly, Microsoft’s current market valuation remains elevated, with a forward P/E (price-to-earnings) ratio of approximately 33, which is above the sector average for technology companies. Over the past twelve months, free cash flow (FCF) exceeded 75 billion USD, underscoring financial resilience. However, with a current capitalisation of around 3.1 trillion USD, this corresponds to a free cash flow yield below 2.5%, indicating a premium valuation. Moreover, competitive pressures in the AI segment, including from Alphabet (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN), as well as potential antitrust risks in the US and EU, could introduce further volatility.

Nevertheless, Microsoft’s high margins, Azure’s growth trajectory, and the scaling of AI-driven products position the company as one of the most balanced players in the market. For long-term investors willing to accept a premium valuation in exchange for strong visibility and leadership in key technology trends, Microsoft shares remain highly attractive.

Microsoft Corporation Q4 FY 2025 financial results

On 30 July 2025, Microsoft published its earnings report for Q4 of FY 2025, which ended on 30 June. The key figures are outlined below, compared to the same period in the 2024 financial year:

Revenue: 76.4 billion USD (+18%)
Net income: 27.3 billion USD (+24%)
Earnings per share: 3.65 USD (+24%)
Operating profit: 34.3 billion USD (+23%)

Revenue by segment:

Productivity and Business Processes: 33.1 billion USD (+16%)
Intelligent Cloud: 29.9 billion USD (+26%)
More Personal Computing: 13.5 billion USD (+9%)

In Q4 2025, Microsoft returned 9.4 billion USD to shareholders through dividends and share repurchases.

On a full-year basis, revenue reached 281.7 billion USD (+15%), operating profit totalled 128.5 billion USD (+17%), net income was 101.8 billion USD (+16%), and EPS stood at 13.64 USD (+16%).

The forecast for Q1 2026 anticipated strong growth in revenue and profit driven by Azure, Copilot, and enterprise AI solutions. It was projected that capital expenditure could reach a record 30 billion USD, required for the expansion of AI infrastructure across the US and Europe. Over the longer term, Microsoft envisaged a shift in revenue composition towards high-margin AI software and enterprise solutions. The forecast also projected growth in Microsoft 365 subscriptions, LinkedIn’s user base, and advertising revenue, fuelled by AI integration. Synergy with GPT models remained a key strategic asset.

Microsoft’s management emphasised the continued expansion of its cloud business and the strengthening of its AI position. Satya Nadella stated that cloud technologies and AI are the key drivers of digital transformation, with Azure becoming the platform for the next phase of business development, surpassing 75 billion USD in annual revenue (+34%). The active adoption of Copilot and OpenAI models is strengthening customer retention and increasing average spend.

Chief Financial Officer Amy Hood highlighted a 37% increase in commercial bookings and a rise in long-term contracts. High capital investments in AI infrastructure will continue, exerting pressure on margins but laying the groundwork for future growth.

Microsoft Corporation Q1 FY 2026 financial results

On 29 October 2025, Microsoft released its financial report for Q1 of fiscal year 2026, which ended on 30 September. The key figures, compared with the same period of fiscal year 2025, are as follows:

Revenue: 77.7 billion USD (+18%)
Net income: 30.8 billion USD (+22%)
Earnings per share: 4.13 USD (+23%)
Operating profit: 38.0 billion USD (+24%)

Revenue by segment:

Productivity and Business Processes: 33.0 billion USD (+17%)
Intelligent Cloud: 30.9 billion USD (+28%)
More Personal Computing: 13.8 billion USD (+4%)

Microsoft started fiscal year 2026 with a very strong Q1: revenue grew by 18% y/y, operating profit increased by 24%, and non-GAAP EPS (excluding losses related to OpenAI) reached 4.13 USD (+23%). The key growth driver remained Microsoft Cloud – cloud revenue rose by 26%, Azure and other cloud services grew by 40%, and the commercial remaining performance obligations portfolio climbed by 51% to 392 billion USD.

The Productivity and Business Processes segment posted a 17% revenue increase, supported by sustained growth in Microsoft 365 and Dynamics 365. Intelligent Cloud grew by 28%, while More Personal Computing was up 4%, driven by a moderate recovery in Windows, devices, and search advertising. The gross margin remained strong at around 69%, although it declined slightly due to the capital-intensive nature of AI workloads. Meanwhile, the operating margin expanded to roughly 49% thanks to the scaling of high-margin cloud and software operations.

Microsoft finalised a new agreement with OpenAI under which the commercial arm has been structured as a public-benefit corporation – a for-profit entity with a defined public mission – further deepening the strategic partnership between the two companies. Management emphasised that Microsoft has effectively increased its investment nearly tenfold, while OpenAI has contracted approximately 250 billion USD in additional Azure services. Microsoft’s rights to joint revenue, as well as exclusive access to OpenAI models and intellectual property, are now valid until the achievement of AGI or at least until 2030. At the infrastructure level, the company is building what it describes as a planetary-scale cloud and AI factory, planning to expand its total AI capacity by more than 80% during the current fiscal year.

On the product side, AI is deeply integrated across all business lines. According to management, around 900 million users per month now utilise AI-powered features, with more than 150 million people interacting with Copilot monthly, and Microsoft 365 Copilot, GitHub Copilot, and the new agents are being actively deployed across productivity, programming, cybersecurity, healthcare, and consumer applications.

Capital expenditure in Q1 FY 2026 surged to a record 34.9 billion USD, up from 24.2 billion USD in the previous quarter, as Microsoft continues to expand its GPU fleet and build new data centres. Despite this spike in CapEx, the company generated 45.1 billion USD in operating cash flow. Microsoft’s balance sheet remains robust, with around 102 billion USD in cash and short-term investments, total debt of roughly 43 billion USD, and a net cash position of approximately 59 billion USD, alongside more than 360 billion USD in total equity. In effect, this means that the company can fund its increased AI investments while continuing to make share buybacks and dividend payments, thereby maintaining a very strong financial position.

For the next quarter (Q2 FY 2026), management projects total revenue in the range of 79.5–80.6 billion USD, representing growth of around 14–16% y/y. The operating margin is expected to remain roughly in line with the prior year, although slightly lower than in Q1 due to seasonal factors.

By segment, Productivity and Business Processes revenue is forecast at 33.3–33.6 billion USD (+13–14% y/y).

The Intelligent Cloud segment is expected to reach 32.25–32.55 billion USD (+26–27% y/y), with management noting that capacity remains tight and demand continues to outpace supply.

For More Personal Computing, the forecast is more modest – 13.95–14.45 billion USD. Revenue from Windows OEM and devices is expected to decline by a few percentage points, while Xbox content and services revenue is also expected to decrease slightly due to a strong prior-year comparison base.

Overall, Microsoft is entering fiscal year 2026 with strong revenue and cash flow growth while executing an unprecedentedly large-scale investment program in AI. The sustainability of future EPS growth will depend on how quickly the company can scale AI adoption, maintain pricing power, and effectively manage competitive and regulatory risks.

Fundamental analysis of Microsoft Corporation

Fundamental analysis of Microsoft Corporation (MSFT) based on the Q3 2025 results:

Liquidity and access to financing:

at the end of the quarter, Microsoft held 28.85 billion USD in cash and 73.16 billion USD in short-term investments, totalling about 102.0 billion USD in highly liquid assets. Total current assets stood at 189.07 billion USD against current liabilities of 135.0 billion USD, giving a current ratio of roughly 1.4 – a comfortable level for a company with predictable cash flows and a large share of recurring subscription revenue.

Microsoft continues to hold the highest possible AAA credit rating for its unsecured long-term debt, enabling it to borrow on highly favourable terms. Given the scale and stability of its business, the company appears far removed from any liquidity or solvency concerns.

Debt and leverage:

the current portion of long-term debt amounts to 7.83 billion USD, with long-term debt totalling 35.38 billion USD, for combined interest-bearing obligations of around 43.2 billion USD.

Against 102.0 billion USD in cash and short-term investments, this translates into a net cash position of roughly 59 billion USD.

Shareholders’ equity totals 363.1 billion USD, with total liabilities of 273.3 billion USD and total assets of 636.4 billion USD. The gross debt-to-equity ratio stands at approximately 0.12, indicating an exceptionally low balance-sheet leverage, while net cash represents about 16% of total equity. The debt structure is primarily composed of long-term bonds with staggered maturities, which reduces refinancing risk.

Cash flow and dividend coverage:

operating cash flow for Q1 FY 2026 reached 45.06 billion USD, up from 34.18 billion USD a year earlier – an increase of 32% y/y. Capital expenditure on property, plant and equipment was 19.39 billion USD, noticeably higher than 14.92 billion USD in the prior year, reflecting accelerated investment in data centres and AI infrastructure. Including leased equipment and other non-cash components, total CapEx for the quarter is estimated at around 34.9 billion USD, underscoring the company’s aggressive capacity expansion for AI-related workloads.

For shareholders, it is important to note that despite such elevated CapEx, Microsoft paid approximately 6.17 billion USD in dividends and repurchased 5.65 billion USD worth of shares. In other words, the current free cash flow covers dividends more than four times over, and the combined capital return (dividends plus buybacks) roughly twice over, while a portion of the free cash flow remains within the company to further strengthen the balance sheet.

Conclusion – fundamental view on MSFT:

Microsoft entered fiscal 2026 in very strong shape. Revenue and operating profit are growing at double-digit rates, the operating margin remains high, and the cloud segment continues to be the primary driver of profit. Free cash flow is increasing even faster than revenue, highlighting the company’s operational efficiency. The balance sheet remains net-cash positive – with ample liquidity, minimal debt, and expanding equity driven by retained earnings.

The main risk is not liquidity but the return on investment in AI. Capital expenditure has risen sharply and is already exerting pressure on the cloud division’s gross margin as Microsoft continues to expand its AI infrastructure. Should these investments yield lower-than-expected returns, profit and free cash flow growth could slow. Nevertheless, given the current metrics – strong operating cash flow, large net cash reserves, an AAA credit rating, and robust profitability – Microsoft’s financial position as of Q1 FY 2026 remains exceptionally solid. Even its highly ambitious AI investment program is still fully financed through internal resources.

Expert forecasts for Microsoft Corporation stock for 2025

Barchart: 41 out of 48 analysts rated Microsoft Corporation shares as a Strong Buy, 5 as a Moderate Buy, and 2 as Hold. The highest price target is 700 USD, and the lowest is 490 USD.
MarketBeat: 39 out of 40 specialists rated the stock as Buy, and 1 as Hold. The highest price target is 730 USD, and the lowest is 490 USD.
TipRanks: All 34 experts rated the stock as Buy. The highest price target is 700 USD, and the lowest is 540 USD.
Stock Analysis: 14 out of 32 experts rated the stock as a Strong Buy, 17 as Buy, and 1 as Hold. The highest price target is 700 USD, and the lowest is 550 USD.

None of the analysts recommended selling Microsoft Corporation shares.

Expert forecasts for MSFT stock for 2025

Technical analysis and 2025 forecast for Microsoft Corporation stock

On the weekly chart, Microsoft Corporation shares are trading within an upward channel and have reached the upper boundary, which serves as resistance for the price. Following the publication of the Q1 FY 2026 report, MSFT shares moved lower, forming a Double Top pattern on the chart, which signals a potential further decline in the share price. Based on the current performance of Microsoft Corporation shares, the possible scenarios for 2025 are as follows:

The base-case forecast for Microsoft Corporation shares anticipates a break below support at 492 USD, which would signal MSFT’s fall within the Double-Top pattern towards 450 USD. At this level, the correction in MSFT shares may come to an end, as suggested by a potential rebound from support at 450 USD. In this case, MSFT could once again move towards the upper boundary of the ascending channel at 580 USD. If the upper line of the channel is breached, the next upside target could be the maximum level forecast by analysts, at 730 USD.

The alternative forecast for Microsoft Corporation stock envisions an upward move in MSFT from the current level, treating the post-report decline as a completed correction. In this case, the first growth target would be resistance at 550 USD. A breakout above this level would indicate increased investor optimism, which could raise volatility in MSFT shares, allowing the price to reach 700 USD relatively easily.

MSFT stock analysis and forecast for 2025

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