Microsoft beats expectations, but stock market punishes a weaker cloud outlook
Revenue and profits are higher than expected, but Microsoft's outlook disappoints investors. The stock falls, even though AI demand exceeds cloud supply.
Microsoft company sign on a street in Taiwan with decorations for Chinese New Year
(Image: fds)
Microsoft again significantly increased revenue and profits in the past quarter, with cloud businesses remaining the biggest growth drivers. Demand for cloud capacity continues to exceed server supply. While analyst expectations were exceeded, this was not the case for the outlook. The company appears more reserved about cloud growth than hoped, causing the Microsoft stock to take a hit in after-hours trading.
Microsoft managed to increase total revenue in the past three months of 2025 to $81.3 billion. This is 17 percent more than in the same period last year, when Microsoft's AI businesses in the cloud had driven revenue. Industry experts had expected around $80.3 billion in revenue. Microsoft itself had also anticipated revenue between $79.5 and $80.6 billion for the year-end business last fall.
Revenue Rises, Profits Even More So
The unexpectedly high revenue in the second quarter of fiscal year 2026, which ended in December, has led to a 21 percent increase in operating profit to $38.3 billion year-over-year and a 60 percent increase in net profit to $38.5 billion.
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The revenue driver remains the cloud business. Here, Microsoft was able to increase revenue by 26 percent year-over-year to a total of $51.5 billion. The revenue from the so-called “intelligent cloud” grew by an even greater 29 percent and, at $32.9 billion, represents the largest portion of the cloud business. For the first time, Microsoft is providing user numbers for Microsoft 365 Copilot, the AI assistant for cloud office. Of the 450 million M365 subscribers, 15 million have booked the AI. There is thus potential for growth here.
Outlook for Cloud Billions
Furthermore, Microsoft reports outstanding cloud bookings worth $625 billion that have not yet been realized. This corresponds to an increase of 110 percent compared to the previous year and is primarily thanks to OpenAI. As part of new partnership rules between Microsoft and OpenAI, the AI developers have committed to purchasing Azure services worth an additional $250 billion. The only question is when OpenAI will book and pay for these cloud capacities, so these amounts have not yet been considered in the business figures.
In contrast, the PC and gaming products business is stagnating. Revenue from Windows licenses and devices grew by only 1 percent, while Microsoft even recorded a 5 percent decline in Xbox content and services. At least revenue from search (Bing) and news advertising was increased by 10 percent. The revenue of the career network LinkedIn also continued to grow, by 11 percent.
Cautious Forecast
In discussions with investors and analysts, Microsoft provided an outlook for the results of the current business quarter. According to CNBC, the company expects revenue between $80.65 and $81.75 billion, which is in the middle of the $81.2 billion forecast by observers. At the same time, this would be an increase of almost 16 percent compared to the previous year.
However, Microsoft expects a profit margin of only 45.1 percent, which is below the 45.5 percent expected by analysts. Microsoft also anticipates cloud growth of 37 to 38 percent. Investors might have hoped for slightly more here, causing the stock to fall by around 6 percent in after-hours trading.
(fds)
