Microsoft turned in a strong quarter and issued upbeat guidance.
Its Azure cloud computing unit once again led the way with revenue growth of 33%.
Azure and AI should continue to help drive growth for the company moving forward.
Only one "Magnificent Seven" stock lagged the performance of the S&P 500(SNPINDEX: ^GSPC) last year, and that was Microsoft(NASDAQ: MSFT). However, after reporting strong fiscal Q3 results and issuing upbeat guidance, the software giant is well on its way to having a better 2025.
Let's take a look at the company's most recent report and guidance to see if the stock can continue to rally and shed its laggard status in 2025.
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Azure continues to drive growth
While best known for its suite of software productivity tools, such as Excel and Word, as well as its Windows personal computer (PC) operating system, it is the company's cloud computing unit Azure that has become its biggest growth driver in recent years. This continued to be the case last quarter.
For fiscal Q3, Azure revenue climbed 33%, or 35% in constant currencies. It marked the seventh straight quarter of 30% or more revenue growth at Azure and was above its earlier forecast for growth of between 31% to 32% in constant currencies. The company credited capacity coming online quicker than expected, while noting that it saw outperformance in its non-AI (artificial intelligence) business. AI services, meanwhile, accounted for nearly half of Azure's overall growth.
Overall "intelligent cloud" revenue, where Azure sits, climbed 21% year over year to $26.8 billion. GitHub also continues to be a strong contributor to this segment, with GitHub Copilot users quadrupling year over year to more than 15 million users.
Looking ahead, the company forecast Azure revenue to grow by 34% to 35% in constant currencies in fiscal Q4, driven by strong demand for its portfolio of services. It noted that demand is currently growing a bit faster than expected, which will lead to some capacity constraints after June.
Microsoft plans for its fiscal 2026 capital expenditure (capex) budget to be higher than fiscal 2025, but to grow at a slower rate. It plans to invest in a greater mix of short-lived assets, which it said will better directly correlate to revenue than long-lived assets. This essentially means that it plans to invest more in things like servers and graphic processing units (GPUs) next fiscal year, as opposed to real estate and data center buildings.
Image source: Getty Images.
Microsoft's other segments, productivity and business processes, where Microsoft 365 and LinkedIn reside, saw revenue climb 10% year over year to $29.9 billion. Growth was solid across its four main solutions in the segment.
Microsoft 365 Commercial
Microsoft 365 Consumer
LinkedIn
Dynamics
Revenue growth
11%
10%
7%
11%
Data source: SEC filings.
Microsoft said that Microsoft 365 Copilot customer adoption has tripled year over year, and that deal sizes continue to grow. It added that a record number of customers returned to buy more seats in the quarter. Meanwhile, its cloud-based business applications platform, Dynamics 365, continued to see strong adoption.
Revenue in its "more personal computing" segment, home to Windows and Xbox, rose 6% year over year at $13.4 billion. Its search and news advertising business, which is also part of the segment, led the way with 21% revenue growth. The company said the growth was driven by usage from third-party partnerships. Windows OEM and device revenue, meanwhile, rose 3%.
Microsoft's total revenue increased by 13% year over year to $70.1 billion, with earnings per share (EPS) jumping 18% to $3.46. The results handily topped analyst consensus estimates calling for $68.4 billion in revenue and $3.22 in EPS, as compiled by LSEG.
For its fiscal Q4, Microsoft forecast revenue of between $73.15 billion to $74.25 billion, which was above the $72.26 billion consensus.
Is the stock a buy?
After lagging its Magnificent Seven peers last year, Microsoft appears poised to continue its solid growth in the coming years. Azure has proven to be a cloud computing juggernaut. The company is carefully growing capacity to meet demand, while not getting too far ahead of itself. That's a smart move.
Meanwhile, its other businesses continue to see solid growth. Copilot 365 continues to be a nice opportunity, but the company also needs to continue to improve and innovate in this area as well. The world of AI is moving rapidly, and it remains anyone's game to win.
The stock now trades at a forward price-to-earnings (P/E) ratio of under 29 based on fiscal 2026 analyst estimates. That appears to be a fair valuation, but certainly not a bargain-basement price.
As such, I think Microsoft is a solid stock to own over the long term, but I would not necessarily chase it after its strong post-earnings gains.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
