Microsoft to Report Earnings Amidst AI Industry Shakeup
Microsoft (MSFT) will disclose its Q2 earnings results post-market on Wednesday, confronting the ongoing fallout from DeepSeek's disruption in the AI landscape.
AI Infrastructure Investments and China's Disruption
Like other Big Tech companies, Microsoft has invested heavily in data centers and infrastructure to support its AI initiatives. However, China's DeepSeek challenged the assumption that the most advanced AI models require expensive, high-powered chips.
DeepSeek's R1 model, released in January, reportedly trained on less powerful and cost-effective systems. This development raised concerns about the necessity of Microsoft's substantial infrastructure investments.
Earnings Expectations and Key Metrics
Analysts anticipate Microsoft to post EPS of $3.13 on revenue of $68.8 billion. Last year's corresponding quarter saw EPS of $2.93 on revenue of $62 billion.
The Commercial Cloud segment revenue, encompassing cloud services sales, is projected at $41.1 billion, while the intelligent cloud business (Azure platform) is expected to generate $25.8 billion.
Analyst Insights
Brent Thill, an analyst at Jefferies, predicts Azure's growth will accelerate in H2 2025. He cites improved cloud consumption trends and OpenAI's recent Azure commitment.
Stock Performance and Outlook
Despite its role in the AI boom, Microsoft's stock performance has lagged behind competitors. While Amazon (AMZN) and Google (GOOG) have gained significantly, Microsoft's shares have risen only 5% over the past year.
Analysts believe the stock is poised for a "mini revenge trade" as AI sales grow, Copilot adoption improves, and capital expenditure moderates, freeing up cash flow.
PC Revitalization Efforts
Microsoft is attempting to revitalize PC sales with its Copilot+ PC lineup, aiming to enable native AI application execution. However, current use cases for these applications may not justify upgrades, as hardware enhancements remain the primary incentive for PC purchases.