Microsoft Q2 2025 Earnings Preview: All Eyes on AI and Cloud

Key points:

• AI Leadership Faces New Challenges: Microsoft’s Q4 FY2024 earnings will highlight its continued success in AI-driven growth, but the emergence of DeepSeek’s cost-efficient AI models raises questions about the sustainability of high-cost infrastructure investments.
• Azure and Gaming in Focus: Azure remains Microsoft’s core growth engine, expected to deliver USD 37.2 billion in revenue, while the Activision Blizzard acquisition boosts diversification through gaming, with Xbox revenues already surging.
• Market Disruption Looms: DeepSeek’s innovations have shaken global tech markets, intensifying competition and pressuring valuations for Big Tech, including Microsoft, as the company navigates this pivotal moment.

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Microsoft’s upcoming quarterly earnings report (Q2 2025) is just around the corner, and all eyes are on how the tech giant is capitalising on artificial intelligence (AI). Over the past year, Microsoft has positioned itself as a leader in the AI revolution, integrating advanced tools like OpenAI’s GPT-4 into its Azure cloud services and Microsoft 365 suite. However, the tech landscape has recently been disrupted by the emergence of Chinese AI startup DeepSeek. This new player has rattled markets, raising questions about America’s tech dominance and the sustainability of high-cost AI models.

The big question for Microsoft is: can Microsoft’s AI investments continue to deliver, or will challenges like data centre constraints and fierce competition weigh on its growth story? And is the high valuation justified?

Here’s what you need to know about the company’s key drivers, challenges, and opportunities ahead of the big earnings day.

 

AI: The Heart of Microsoft’s Growth Story

AI has been at the heart of Microsoft’s growth story, with tools like the Azure OpenAI Service and Microsoft 365 Copilot gaining traction across industries. In Q3 2024, AI contributed 8 percentage points to Azure’s impressive 29% year-on-year revenue growth, cementing Microsoft’s leadership in generative AI.

But the emergence of DeepSeek has raised fresh concerns as the Chinese models are significantly cheaper to run on older hardware, challenging the need for high-end, expensive infrastructure like that built by companies such as Nvidia, OpenAI, and Microsoft.

For Microsoft, this development adds a layer of uncertainty. While the company has invested heavily in AI infrastructure, including plans to spend USD 80 billion in 2025 to expand data centre capacity, investors are now questioning whether such expenditures are sustainable or necessary in the face of cheaper alternatives.

What to Expect in Q4 FY2024

Analysts are predicting a strong quarter for Microsoft, even though growth is slowing:

• Revenue: Forecast to reach USD 68.9 billion, a 11.1% increase compared to the previous year.
• Earnings Per Share (EPS): Expected at USD 3.13, a 6.8% rise year-on-year.
• Cloud and AI Focus: The Intelligent Cloud segment, which includes the powerhouse Azure platform, is expected to be a significant contributor to Microsoft’s success with projected revenue of USD 25.9 billion, a 20% year-on-year increase.

These numbers would mark its slowest earnings growth in eight quarters and slowest sales growth in six quarters. Microsoft’s acquisition of Activision Blizzard is expected to bolster its gaming division, which saw Xbox content and services revenue surge by 61% last quarter.

Key Questions for Investors

1. Can AI Sustain Its Momentum? AI tools like Copilot have seen rapid adoption, with active users doubling last quarter. Investors will be eager to learn whether this growth is translating into meaningful revenue gains and if Microsoft’s AI infrastructure is ready for continued demand.
2. How Will Azure Perform? Azure is the backbone of Microsoft’s cloud business, but fierce competition from Amazon Web Services and Google Cloud continues. Investors will want to see if Azure can sustain its growth amid ongoing capacity constraints.
3. Is Microsoft’s Diversification Strategy Paying Off? Beyond AI and cloud, Microsoft’s gaming and productivity software divisions provide significant revenue streams. Updates on the performance of these areas will be closely watched.

Opportunities and Challenges

Opportunities:

• AI Leadership: Microsoft is positioning itself as a leader in generative AI, which is becoming increasingly integral to business operations worldwide.
• Diversified Revenue Streams: With growth in gaming and productivity tools like Microsoft 365, Microsoft reduces its dependence on a single segment.
• Enterprise Partnerships: Hybrid cloud solutions, such as Azure Arc, continue to make Microsoft a trusted partner for digital transformation projects.

Challenges:

• Capacity Constraints: Data centre limitations have hindered Azure’s ability to fully meet demand for AI workloads. While Microsoft is investing heavily to expand capacity, these challenges are likely to persist into the first half of FY2025.
• Competitive Pressures: Rivals like Amazon’s AWS and Google Cloud are innovating rapidly, challenging Microsoft’s dominance. Any aggressive pricing strategies or innovations from these rivals could impact Azure’s growth.
• Valuation Concerns: Microsoft’s stock is trading at a premium, with a forward price-to-earnings ratio of 34. If the company misses expectations or provides cautious guidance, the stock could face downward pressure.
• DeepSeek Disruption: If cost-effective models like DeepSeek’s gain traction, Microsoft may face pressure to lower prices or rethink its AI strategy.

Why This Matters for Investors

For short-term traders, Microsoft’s ability to sustain Azure’s growth and counteract DeepSeek’s market disruption will be key to the stock’s near-term performance. For long-term investors, the focus will be on Microsoft’s ability to maintain its AI leadership and leverage its diversified business model to adapt to a rapidly evolving landscape.

The emergence of DeepSeek has added complexity to an already pivotal earnings season for Big Tech. While Microsoft’s long-term prospects remain strong, this report will offer crucial insights into how the company is navigating immediate challenges and positioning itself for future success.

Stay tuned—this report could set the tone for the broader tech sector in the months to come.