Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
Global Head of Investment Strategy
If Wall Street is the Oscars, Microsoft has just walked away with Best Picture. Its recent earnings were a masterclass performance, dazzling analysts and investors alike. But behind the glamour of headline numbers lies a strategic clarity that's transforming Microsoft into an indispensable giant of AI and cloud computing. Let’s unpack these results and explore precisely what they mean for you as an investor.
Microsoft didn’t just beat expectations—it demolished them. Revenues climbed 13% to a record USD 70.1 billion, blowing past Wall Street’s forecasts by nearly USD 2 billion. Even more impressive, earnings per share surged to USD 3.46, a remarkable 8% above consensus.
Investors loved the news. Microsoft shares leaped by almost 7% after hours, sending a clear message: confidence in Microsoft’s future is booming.
The real magic behind these numbers? Cloud computing and artificial intelligence. Azure, Microsoft’s cloud powerhouse, grew a stunning 35%, accelerating growth beyond expectations, as AI services contributed nearly half of this surge.
Microsoft CFO Amy Hood provided strong forward guidance, indicating Azure’s impressive momentum should continue, forecasting growth of up to 35% again in the current quarter, further boosting investor confidence.
CEO Satya Nadella directly addressed recent speculation about slowing AI infrastructure demand, noting that cancellations of some US data centre leases were strategic, intended to avoid being caught "upside down" by overbuilding in certain locations while demand shifts elsewhere. Nadella affirmed Microsoft’s robust expansion pace, emphasizing the recent opening of new data centres in 10 countries.
Amid the fanfare, something subtle and critical is happening: after ten relentless quarters of heavy investments in data centres—once dubbed "the largest infrastructure build-out humanity has ever seen"—Microsoft slightly eased off the accelerator. Capital spending moderated to USD 21.4 billion, less than expected, signaling that Microsoft may be entering a phase of greater profitability.
CFO Amy Hood confirmed capital expenditures will rise next year, though at a lower rate than the 57% increase expected this fiscal year. She also highlighted ongoing supply constraints, indicating demand for data centres still far exceeds current capacity, reassuring investors that Microsoft's infrastructure investments remain prudent.
Microsoft isn't immune to the winds of economic change. Rising tariffs and global uncertainty present real risks—especially as these pressures could cause some businesses to cut back on expensive technology upgrades. However, Microsoft’s diversified portfolio, from Xbox to LinkedIn, continues to show impressive resilience, posting growth even in tougher economic climates.
CFO Amy Hood remarked that "demand signals" have remained consistent into the current quarter, suggesting major corporate customers aren’t slashing technology budgets just yet. CEO Satya Nadella notably called software "the most valuable resource" for businesses facing inflationary or growth pressures, as companies increasingly seek efficiency and productivity gains through technology.
Microsoft’s story remains compelling beyond today’s triumphs. With heavy infrastructure spending largely complete, Microsoft is transitioning towards the more profitable phase of AI—delivering AI-enabled applications and services rather than merely building out infrastructure.
Microsoft’s nuanced relationship with OpenAI remains significant, with a strategic shift allowing OpenAI to work with other cloud providers like Oracle. Microsoft retains a substantial financial stake in OpenAI and is in discussions to convert future profits into equity—another potential long-term upside for investors.
Here’s exactly what you, as an investor, should keep on your radar:
Microsoft's earnings weren’t merely strong—they were a strategic masterstroke, reinforcing its leadership in AI and cloud computing at precisely the right moment. For investors, the message is clear: Microsoft is no longer just participating in tech’s biggest wave—it’s leading it.
As investors ponder these latest results, one metaphor rings true: Microsoft isn't just navigating the tech seas—it’s reshaping the oceans themselves. For those invested or considering investment, this is exactly the narrative you want to hear.