Microsoft's Q2 Earnings: Navigating AI Storm and Proving Cloud ROI

Amidst the AI industry's seismic shift fueled by China's DeepSeek, Microsoft (MSFT) prepares to release its Q2 earnings after the bell on Wednesday.

AI Impact and Cloud Investment

Microsoft and other tech giants continue to invest heavily in data centers and infrastructure to support AI software development and deployment. However, DeepSeek's R1 model has challenged the notion that the most expensive chips are essential for AI development.

Microsoft's challenge now is to demonstrate the profitability of its AI initiatives and justify its significant infrastructure investments.

Earnings Expectations

Analysts anticipate Microsoft to report earnings per share (EPS) of $3.13 and revenue of $68.8 billion for the quarter, per Bloomberg consensus data. This represents a projected increase from Q2 2022, when Microsoft reported EPS of $2.93 on revenue of $62 billion.

Commercial Cloud Growth

The Commercial Cloud segment, encompassing cloud services sales, is expected to generate $41.1 billion in revenue. This marks a significant increase from the $31.9 billion reported in Q2 last year.

Azure, Microsoft's intelligent cloud platform, is projected to contribute $25.8 billion, up from $21.5 billion.

Azure Reacceleration

Jefferies analyst Brent Thill predicts Azure growth will pick up in the second half of 2025. He notes positive indications of improving core cloud trends and Microsoft's recent Azure commitment from OpenAI.

Stock Performance

Despite being a key player in the AI boom, Microsoft's stock price has underperformed rivals. However, Evercore ISI analyst Kirk Materne sees potential for a "mini revenge trade" as AI sales rise, Copilot adoption improves, and capital expenditures moderate.

Copilot+ and PC Sales

Microsoft aims to reinvigorate PC sales through its Copilot+ PC lineup. AI PCs promise to run AI applications natively, but compelling use cases remain limited. Hardware upgrades continue to be the primary driver of consumer PC purchases.

Conclusion

Microsoft's Q2 earnings will be a pivotal moment for the company to prove the value of its AI investments and capitalize on the growing AI market. The results will also shed light on the health of its cloud business and the potential of Copilot+ to revive PC sales.