Story Stocks^®

Microsoft (MSFT -12%) is trading lower despite delivering an impressive EPS beat with its fiscal Q2 (Dec) report. That said, the upside was the smallest EPS beat of the past four quarters, which may be tempering enthusiasm. Revenue rose a strong 16.7% yr/yr to $81.27 bln, topping expectations and marking a milestone as Microsoft surpassed $80 bln in quarterly revenue for the first time. Q3 (Mar) revenue guidance was in-line. Notably, Microsoft Cloud revenue exceeded $50 bln for the first time, underscoring sustained demand across its cloud portfolio.

• Azure revenue grew +38% CC, modestly above prior guidance of +37% CC, though investor reaction was mixed as some expected a bit more upside given robust demand conditions.
• Microsoft guided Q3 Azure growth of +37-38% CC, reflecting continued strong demand across workloads, customer segments, and geographies, with demand still outpacing available supply.
• Productivity and Business Processes (PBP) revenue rose 14% CC to $34.1 bln, driven by steady core execution and increasing contributions from M365 Copilot, with M365 Commercial cloud revenue also up 14% CC.
• More Personal Computing (MPC) revenue declined 3% CC, with Search and news advertising ex-TAC slightly below expectations due to execution challenges. Gaming revenue fell 10% CC, pressured by weaker-than-expected Xbox content and services revenue.
• Capital expenditures increased to $37.5 bln in Q2 from $34.9 bln in Q1, with roughly two-thirds allocated to short-lived assets such as GPUs and CPUs, reflecting continued AI infrastructure buildout.

Briefing.com Analyst Insight:

Microsoft delivered a very strong quarter operationally, with impressive revenue growth, solid commercial bookings, and robust RPO trends. However, investor unease appears tied to the pace of cap-ex expansion, which is running hotter than expected, while Azure growth—though strong—may be decelerating slightly relative to lofty expectations. Elevated capital spending is also constraining free cash flow growth, raising questions about near-term return on investment. While long-term AI demand remains unquestioned and supply constraints persist, the market is likely seeking clearer evidence that Azure growth can reaccelerate enough to offset rising infrastructure costs.