Microsoft Stock is Skyrocketing - Here's What You Need to Know

As promised, today we are going to be going through Microsoft's most recent earnings report that they put out yesterday after the market closed. The stock is up roughly 17% on the day today. So, it's pretty safe to say that investors loved this earnings report. And in this video, I am going to explain exactly why and also show you all of the highlights. But before we get into Microsoft's earnings, I quickly want to let you know that I try my best to cover as many earnings reports as I possibly can on my channel. So, if you want to see more like Amazon's coming up here, then make sure to hit that subscribe button right now. But with that being said, let's stop wasting time and let's get into the video. And I also will be explaining why I think that Microsoft stock is surprisingly still looking cheap today. So, let's get into our first screenshot now. All right, so let's start off from the top by discussing the highlights from the quarter. Here we can see that revenue came in at $90 billion, which was up 18% or 17% in constant currency. Operating income was 40.6 6 billion up 18% net income was 35.8 billion which is up 31% on a GAP basis and was 35.3 billion or up 22% on a non-GAAP basis and I think that investors should be focusing on non-GAAP which I will explain here in a second but first diluted earnings per share was $4.81 81 cents up 32% on a GAP basis and up 23% on a non-GAAP basis. Then Microsoft explains that non-GAAP results exclude the impact from their investments in OpenAI. And since Microsoft's investment in OpenAI is extremely volatile and could be a one-off benefit and potentially in the future could even be a headwind for earnings, I think it's best to just strip that out and focus on the business's actual operating earnings, which is what their non-GAAP metric is doing. And on a non-GAAP basis again they just grew earnings per share by 23%. Which is very strong. Then Satia says we are advancing the frontier on the cost to outcome curve ensuring every customer can turn tokens into business results. This year Azure revenue surpassed $100 billion for the first time and Microsoft 365 copilot reached over 30 million paid seats reflecting the confidence customers are placing in us to power their AI transformation. Now, this is one of the main reasons why I think Microsoft stock is responding so well today because there was a lot of fear around Microsoft being able to sell their AI co-pilot seats into their existing massive customer base, but it sounds like they are successfully doing so now. And also, I was reading that their co-pilot revenue is up 60% quarter over quarter. So, their AI adoption of C-pilot is going very well and a lot of their existing customers are now adopting their AI services. And this is really breaking the narrative that Microsoft's software business is going to be disrupted by new AI software companies that are being vibecoded, for lack of a better term. Microsoft being able to sell their own AI subscriptions successfully in their existing customer base is really what I think the market wanted to see. And now you're also starting to see that investors are bidding up Microsoft stock today on the same day that a lot of software stocks are selling off. Whereas over the past few months, Microsoft's stock price was basically following whatever the software sector was doing. But now it seems like that trend has officially broken. And it's great to see that they are officially not being disrupted by AI, which I don't think any serious investor thought, and their AI subscriptions are taking off. All right, now moving on to the next screenshot. This one shows the growth rates of all of their different business segments. So very quickly, Microsoft cloud revenue was up 27%. Commercial remaining performance obligations were up 84%. Microsoft 365 commercial cloud revenue up 14%. Microsoft 365 consumer cloud revenue up 22%. LinkedIn revenue up 10%. Dynamics 365 revenue up 12%. Azure revenue up 43% and a further acceleration. Windows OEM and devices down 7%, Xbox content down 10% and then advertising revenue up 9%. So from this table you can see that every business except OEM, Xbox and search advertising are growing double digits which is great to see. As I said Azure growth was also 43% and accelerating and this is massive because Azure is doing over a hundred billion in annual revenue. Now seeing 40% plus growth on $100 billion in revenue is insane and the hyperscalers are continuing to show us that the law of large numbers apparently does not apply to them. Moving on to the next screenshot. This one shows us the growth rate trends over the past five quarters. And here we can see that Microsoft 365 commercial has actually been decelerating but it is still growing by 14% year-over-year. Microsoft seat growth has also been growing 6% extremely consistently. So it seems like Microsoft's number of seats that they are selling into is not going down and in fact it is continuing to grow. And this was another bare case against software companies overall is that their number of seats that they would be selling into would decline as employee counts at companies go down and ultimately less software is needed. But that bare case is not showing up in Microsoft's results. Moving on though, we can see that Microsoft consumer cloud is growing at 22%. but it has been decelerating over the past four quarters now, but it's still growing quite strong. Dynamics 365 revenue also came in at 12% and it has been consistently decelerating pretty much every single quarter, which is not ideal to see. Moving on to the next slide, Intelligent Cloud had an extremely strong quarter though. Revenue increased by $4.6 billion quarter-over-arter, which is the strongest revenue growth quarter that I have seen. I believe that this was actually the strongest quarter for the cloud business in the company's entire history in terms of net revenue added. So, it seems like Microsoft's cloud business is continuing to grow very well. It's scaling and it's actually accelerating. This next screenshot shows us that Azure's revenue growth once again was at 43%. And it has been consistently accelerating over the past five quarters. And this is the strongest revenue growth rate that the company has seen in quite some time. And overall, it's incredible to see that the cloud businesses across the board are accelerating despite their massive scales. All right, now this next screenshot comes from Wall Street Engine on X, and it simply just shows us all of the earnings beats and misses for different metrics. And we can see that across the board for revenue, adjusted earnings per share, Azure, cloud revenue, intelligent revenue, operating income, capex, all beat estimates. The only thing that did not be estimates was the actual capex for this quarter, which came in higher by about $600 million. But overall, I still think that this was a very strong and clean quarter for Microsoft. All right, let's now move on to Microsoft's outlook. And here they are expecting revenue for the next quarter to be 90 billion, which would be 16% year-over-year growth, which is a slight deceleration from the 18% growth that they just posted. Productivity and business processes revenue is expected to be about 37 billion which would be up 12%. And intelligent cloud revenue is expected to come in at 41 billion which would be up another 32.7%. So Microsoft's cloud business seems like it is projected to continue growing extremely well in the next quarter. Continuing on with their outlook in this next slide, Microsoft shows us that Microsoft commercial cloud should be up 15% next quarter. Commercial product is expected to grow mid single digits. consumer cloud in the mid- teens and Azure is expected to continue accelerating to 45% revenue growth in the next quarter. So to put Microsoft's overall outlook into context so far, Azure is projected to continue accelerating and quite well, but the other businesses are decelerating by quite a bit across the board and that's kind of going to be the story for the next quarter. Now their final slide for the outlook has some additional information in regards to capex and spending. So starting from the top, Microsoft said that their capex is unchanged and the market loved this. It responded very well because the market currently does not like the capex that the hyperscalers are doing. Google announced an increase to capex and the market sold it off because the market is becoming more and more concerned that the capex is not going to produce a positive ROI. So Microsoft being the one hyperscaler so far that is not increasing its capex at all is rewarded by the market right now. Then Microsoft said that Azure is expected to continue accelerating in the first half of their next fiscal year. So Azure is projected to continue growing quite strong. Revenue for the full year of 2027 is expected to grow double digits. Commercial cloud is expected to accelerate which is a great thing to see because it shows that Microsoft is expecting their AI adoption in their software business to continue accelerating. Operating income is also expected to grow by double digits which I think is pretty obvious at this point. And capex is expected to grow. That is all they said. They did not give a full number. They did not give a percentage growth rate. They just said that capex is going to grow in their next fiscal year. However, Microsoft also said that they are expecting to remain free cash flow positive during their increased capex buildout. And this is another thing that the market absolutely loved because Amazon, Meta, and Google are all expected to go free cash flow negative over the next year as they continue to spend a significant amount on capex. So, Microsoft is kind of breaking the trend and saying, "Nope, we want to stay free cash flow positive. We're not going to leverage up our balance sheet and we're going to build this all out organically." Now, if we head over to Stock Unlock quickly, we can see that this was a very strong quarter for Microsoft's overall revenue. again hitting 90 billion. If we go to the trailing 12 months, we can clearly see that Microsoft's revenue is at an all-time high of about 332 billion. So, the top line of this business is continuing to grow very strong. Let's now take a look at Microsoft's operating cash flow. And this was another extremely strong quarter for operating cash flow, increasing by 13 billion year-over-year. And in the trailing 12 months, Microsoft has now done $183 billion of operating cash flow. And as I have been saying on my channel for the past year or so, the metrics that I am focusing on for the hyperscalers is I want to see continued revenue growth and acceleration. And I also want to see the operating cash flows and the operating profits of the businesses continuing to grow and scale because I think that this is the best reflection of their capex actually paying off. And both Microsoft's revenue and operating cash flows are continuing to grow, hit all-time highs, and actually accelerate. For example, here we can see Microsoft's operating cash flow growth rate on a year-over-year basis was 34.4% and it has been accelerating consistently since the second quarter of 2025. In fact, the last time that operating cash flow was growing this quick was in the second quarter of 2024. So, Microsoft is seeing a very clear reaceleration to its operating profits and cash flows. So, now let's take a look at Microsoft's free cash flow. And we can see that it hasn't really been growing now since the second quarter of 2022. And this is obviously because Microsoft is investing a significant amount of capital into capex like every other hyperscaler is doing. But what's important to note here is that if we turn on analyst estimates, Microsoft's free cash flow is projected to bottom in the fourth quarter of 2026 at 51.2 billion and then it is projected to start scaling back up. And if we take a look at the yearly estimates, Microsoft is projected to produce $224 billion of free cash flow by 2031. Now, if we compare that to Meta, for example, we can see that they are projected to produce negative $10.5 billion in free cash flow out into 2027. So, Meta's business is actually projected to lose money over the next year or so. And then if we take a look at a yearly view, they are projected to hit $80 billion of free cash flow in 2030. And this is the same story across the other hyperscaler businesses. So it's very clear that Microsoft is the only business that wants to maintain strong free cash flow and profitability while investing in capex and still accelerating the growth of the business. And that is why I think that it is the cleanest hyperscaler in the market right now. So now let's head over to the conference call because this was a great call for Microsoft and there's some highlights that I want to show you. So I'm going to read the underlined segments here where it starts with Satia saying the goal is to have the firm be in control of their own destiny in terms of what I describe as building their human capital and their token capital. This is not going to be about come in and take all of my knowledge and benefit yourself whereas I am not getting anything out of it. You've got to keep your harness separate from the model. The harness will ensure that your memory, your context, all of that is external. That means any given model at any given time is swappable. Use the frontier models for what they deliver. Use the lowcost models for what they deliver. And in fact, train your own model when you don't want to use any external model itself. Because after all, you have all the outputs, you have all the traces, and you have all the context. We want to democratize that design pattern so that every enterprise can use it. So what Satia is saying in this screenshot is that he's telling the market and businesses not to hitch their business to any one model and to not give anyone model all of their internal data. He's saying that you want to be able to switch models out whenever you want and that is what Copilot is letting businesses do. Copilot makes it easy to do so and they could even automate which models are used for what in your business processes and the swappability of different models even the frontier models is making me more bearish on the frontier labs like anthropic and open AAI because it seems like they are continuing to become commoditized and not have any strong differentiation. Moving on to the next screenshot here. The CFO said, "The situation is obviously that demand exceeds available supply in a sort of relatively extreme moment. When you start to think about over the duration, I tried to remind people a lot of the expense, especially as you see it in capex. You've seen our capex really pivot toward what I would call and do call short-lived assets, which really is CPUs and GPUs that have relatively shorter lead times. If the demand environment changes, you just slow down what is in fact the largest component and driver of your cost of goods sold. You can stagger the timing of the buildout. When you think about being able to manage through that, hyperscalers have been doing that for quite a long time in terms of having the flexibility and the understanding of managing those changes in demand. We're reminding people that frankly the cloud offers tremendous benefits versus having to make these purchases as servers on premises yourself. where the price increases are even more hard for customers. So the cloud still provides a great ROI for those types of situations. So what the CFO is saying in this screenshot is that demand is still far higher than supply for the cloud businesses and they are still capacity constraint. Then she also said that Microsoft could cut down capex very quickly since about 2/3 of their capex is GPUs and CPUs. So, the risk of getting stuck with a tons of capex long-term if there is an overbuilt environment is pretty dang low because they can cut back spending pretty much whenever they want. She also highlights that it's a very ROI positive for third-party companies to move to the cloud since computer hardware costs have risen so much and this is actually accelerating the demand for cloud as it's pushing more and more companies to them. All right, moving on to the next screenshot here. Satia said, "All of us are reading this. 1873 is the book to be read." So, in my mind, I think you've got to get the product shape right. You have to get the portfolio right. The mix of customers is super important. You have to recognize the breadth, the geomix, the segment mix, the workload mix, and you've got to really think about all of those when you're even building capacity. You've got to run an efficient railroad. We know that there will be ups and downs of what is the cycle here, but the secular shift is clear and we are very bullish about us coming with the right sort of mix of business and the right margin structure and most importantly the right value for our customers. So what Satya is saying in this screenshot is that 1873 is the book to be read right now and that is a book on the railroad bubble. Satya is saying that Microsoft is thinking about an overbuild or data center or AI bubble and they're thinking about it deeply and he wants to build a diverse portfolio of customers, products, backlog, etc. He also says that there will be ups and downs in the cycle. So having a diversified business is critical and that is what Microsoft is prioritizing and building. All right, moving on to the final conference call screenshot. This one says commercial remaining performance obligations grew 84% to 678 billion. All sequential customer RPO growth was driven by commitments from customers outside of the frontier model companies. And RPO increased 25% when excluding OpenAI. RPO including OpenAI has a weighted average duration of 2.3 years and roughly 30% will be recognized as revenue in the next 12 months up 37% year-over-year. So Microsoft has started to deliberately call out their remaining performance obligation growth excluding open AI and they also said that all sequential growth was from outside the frontier model companies. So Microsoft is telling the market that its growth is largely coming from the nonfrontier LLMs. Now why do you think that they're doing this? Well, in my opinion, it's because it's becoming more and more clear that models are commodities and they are risky businesses long-term. So, Microsoft is trying to make clear that their business is diversified and does not rely on the frontier models. All right, so now let's get back over to Microsoft and talk about the valuation today. So, as I said, I am focusing on the operating cash flows for the hyperscalers right now. And Microsoft's price to operating cash flow is sitting at 18.53 today. If you take a look at its history, this is still low on an operating cash flow basis for this business. For example, in the 2022 sell-off, it got down to an 18.2 price to operating cash flow. And then in the 2020 sell-off, it got down to 19 times operating cash flow. So Microsoft again on an operating cash flow basis is still cheaper than the pit of 2022 and the pit of the COVID crash in 2020. you have to go all the way back to the sell-off at the end of 2018 to get a similar or lower price to operating cash flow. So even though Microsoft stock is up, the sheer growth to the business's operating cash flows have actually caused its multiple to decline quite a bit. Now, if you're someone who prefers earnings, well, right now you can see that Microsoft's forward PE is still only at 23.2, which I think is a very fair multiple for one of the best businesses in the world that's still growing by nearly 20% per year. At the bottom of the sell-off in 2022, it got down to about 21.6. In COVID, it got down to a forward PE of about 23 and then in the sell-off of 2019, it was at about 21. So, even after the rally today, Microsoft's forward PE is still on the lower end of where it has historically traded. Now, lastly, I want to show you my updated DCF for Microsoft factoring in the most recent quarter. As I said, I am focusing on operating cash flows right now. So over the next three years, I am saying that Microsoft will grow operating cash flows by 15% per year and trade for about 20 times operating cash flows. I also believe that these are pretty conservative metrics because Microsoft is currently growing its operating cash flows by 30% year-over-year and a 20 price to operating cash flow is low relative to how the business has historically traded. If we take a look at this chart right here, we can see that Microsoft's median price to operating cash flow over the past 7 years has been about 25.2. 2 and the price to operating cash flow that I am using in the DCF which you can see is still around the lows of 2020 and the lows of 2022. But if Microsoft's business can continue to grow and prove the market wrong, then I do think that its multiple will continue to expand. And even with these pretty conservative metrics and even with these pretty conservative metrics, at least in my opinion, the stock could still produce a 19% compounded annual growth rate over the next 3 years. Its fair value would be $578 and its future stock price would be about 756 bucks which would be about a 66% return from the share price today. So if Microsoft can achieve these metrics then the future compounded annual growth rate could still be very strong even after the 17% spike that the stock is seeing today. So overall, I thought that this was a great quarter for Microsoft that also dispelled a lot of the barricade fears, especially with seat-based pricing, the number of seats, and Microsoft's software business being disrupted by artificial intelligence. It is also very clear that Microsoft Azure is growing extremely well and is expected to continue accelerating and the overall business is continuing to grow by 15 to 18%. The stock is also still trading below its historical average forward price to earnings ratio and its historical average price to operating cash flow ratio which leads me to believe that the stock is looking cheap especially from one of the best businesses in the world. Lastly, Microsoft made it clear that it is not expecting to increase its capex guide for this year and it is probably going to increase it modestly in 2027 because the business wants to maintain a significant amount of free cash flow during the AI capex buildout which makes it a standout business across the hyperscalers and I think that is probably one of the main reasons why the stock is up so much today. But with all that being said, that is going to wrap up my Microsoft earnings analysis video. If you enjoyed the video, then please remember to leave a like on it. And if you want to see more earnings analysis videos, then make sure to hit that subscribe button right now. Also, let me know what you thought of Microsoft's report in the comment section below. And I hope to see you again in tomorrow's video where I will be covering Amazon's earnings report. So, I hope to see you tomorrow and thank you again for watching.