Microsoft to Report Q2 Earnings Amid DeepSeek Fallout
Microsoft (MSFT) is set to release its second-quarter earnings on Wednesday after the market closes. The report comes as Wall Street scrutinizes the impact of DeepSeek's AI breakthrough on tech giants, including Microsoft and its Big Tech peers.
DeepSeek has challenged the industry's reliance on expensive, high-powered chips for AI training with its R1 model. Its success has raised questions about the necessity of Microsoft's substantial investments in data centers and infrastructure for AI deployment.
Microsoft must now demonstrate the profitability of its AI initiatives and justify the magnitude of its infrastructure spending. Analysts anticipate an EPS of $3.13 on revenue of $68.8 billion for the quarter, surpassing the EPS of $2.93 and revenue of $62 billion reported in Q2 2022.
The Commercial Cloud segment, a significant indicator of cloud service revenues, is expected to reach $41.1 billion, outperforming the $31.9 billion generated in Q2 last year. Azure, Microsoft's intelligent cloud platform, is projected to generate $25.8 billion, up from $21.5 billion previously.
Analysts believe Azure growth will rebound in the second half of 2025, supported by Microsoft's ongoing commitment from OpenAI and improving cloud consumption trends.
Despite Microsoft's position as an AI beneficiary, its stock performance has lagged competitors. In the past 12 months, Microsoft shares have gained only 5%, significantly trailing Amazon (44%) and Google (26%). However, analysts remain optimistic about a potential "mini revenge trade" as AI sales, Copilot adoption, and moderate capital expenditures enhance free cash flow.
Microsoft is additionally focusing on revitalizing PC sales through its Copilot+ lineup, aiming to run AI applications natively on PCs. However, compelling applications that justify upgrades are still limited, with hardware improvements remaining the primary driver of consumer PC demand.