Microsoft (NASDAQ: MSFT) recently reported its Q2 fiscal 2025 results (fiscal ends in June), with revenues and earnings exceeding the street estimates. The company reported revenue of $69.6 billion and earnings of $3.23 per share, compared to the consensus estimates of $68.8 billion and $3.11, respectively. The company continued to benefit from increasing sales of Azure cloud computing services. However, the company’s outlook for the third quarter was below expectations, resulting in lower levels for MSFT post the results announcement. But, we think MSFT stock may have some room for growth after its recent dip.
MSFT stock, with 19% returns since the beginning of 2024, has underperformed the S&P 500 index, up 27%. Microsoft’s Azure cloud computing sales growth rate has slowed lately, weighing on its stock price. If you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
How Did Microsoft Fare In Q2?
Microsoft’s revenue of $69.6 billion in Q2 was up 12% y-o-y. Looking at segments, Productivity and Business Processes sales were up 14% to $29.4 billion, driven by higher sales of Microsoft 365 products and LinkedIn solutions. Intelligent Cloud segment revenue was up 19% to $25.5 billion, led by Azure and other cloud offerings. Lastly, More Personal Computing sales were unchanged at $14.7 billion, as growth in Windows OEM and devices was offset by lower gaming sales.
Microsoft saw Azure and cloud services growth of 31% — a slight slowdown from 33% in the previous quarter. The company’s AI-related revenue has reached an annual run rate of $13 billion. Not only did the company see higher sales, its operating margin of 45.5% in Q2 expanded by 190 bps y-o-y. Higher revenues clubbed with margin expansion resulted in earnings of $3.23 per share, up 10% y-o-y. Separately, look at – Buy, Sell, Or Hold META Stock At $690?
What Does This Mean For MSFT Stock?
Azure sales were lower than anticipated, and this didn’t sit well with the investors. Furthermore, the company’s outlook of $68.2 billion revenue in Q3 (at the mid-point of the provided range) is much lower than the consensus estimate of $69.8 billion. As such, MSFT stock is taking a hit post the results announcement. Even if we look at a slightly longer time frame, the increase in MSFT stock over the last four-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 52% in 2021, -28% in 2022, 58% in 2023, and 13% in 2024.
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Given the current uncertain macroeconomic environment around rate cuts and the rise of DeepSeek, could MSFT face a similar situation as it did in 2022 and 2024 and underperform the S&P over the next 12 months — or will it see a strong jump? After its recent dip, we think that MSFT stock has some room for growth. We estimate Microsoft’s Valuation to be $485 per share, reflecting around 15% upside from its current levels. Our forecast is based on 37x expected earnings of $13.11 per share in 2025. While the current P/E ratio of 37x exceeds the stock’s two-year average of 32x, this higher valuation appears warranted given the anticipated earnings growth driven by expanding Cloud and AI contribution.
While MSFT stock looks like it has some room for growth, it is helpful to see how Microsoft’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons. Also, check out our take on – Should You Pick IBM Stock At $250?
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