Microsoft Second Quarter Earnings Preview: AI Impact and Infrastructure Investments Under Scrutiny

Microsoft (MSFT) will release its fiscal Q2 earnings on Wednesday after the market close, as investors eagerly await updates on the company's AI initiatives following the industry-disrupting launch of DeepSeek's R1 model.

DeepSeek's R1 model, trained on less powerful hardware than competing models, has raised questions about the necessity of massive infrastructure investments in AI development. Microsoft, along with other tech giants, has poured billions into data centers and infrastructure to support their AI ambitions.

Now, Microsoft must demonstrate that its investments have yielded tangible results, translating into increased revenue and competitive advantage.

Earnings Expectations

According to Bloomberg consensus data, Microsoft is projected to report earnings per share (EPS) of $3.13 on revenue of $68.8 billion. This would mark a significant increase from EPS of $2.93 and revenue of $62 billion reported in the same quarter last year.

Analysts anticipate strong growth in Microsoft's Commercial Cloud segment, driven by cloud service sales. Revenue is forecast to reach $41.1 billion, up from $31.9 billion. Additionally, the Azure platform is expected to contribute $25.8 billion in revenue, compared to $21.5 billion previously.

AI Growth and Infrastructure Scrutiny

Jefferies analyst Brent Thill believes Azure growth will reaccelerate in the latter half of 2025, supported by increasing consumption and improving cloud trends. He also highlighted Microsoft's recent partnership with OpenAI, which signifies continued investment in AI advancements.

Despite Microsoft's significant role in the AI boom, its stock performance has lagged behind peers. Amazon (AMZN) and Google (GOOG) have seen gains of 44% and 26%, respectively, in the past year, while Microsoft's shares have risen by just 5%.

However, Evercore ISI analyst Kirk Materne predicts a potential "mini revenge trade" for Microsoft as AI sales grow, Copilot adoption improves, and capital expenditures moderate, leading to increased free cash flow.

Copilot+ PC Lineup Focus

Microsoft is also looking to invigorate its PC business with its Copilot+ PC lineup. The strategy aims to enable AI applications to run natively on PCs rather than through the cloud.

However, the company faces challenges in making AI PCs compelling enough for consumers to upgrade from current hardware that still provides satisfactory performance and efficiency.