Microsoft reported third-quarter revenue of $82.9bn ($81.4bn expected), up 15% when ignoring currency moves. Growth was broad-based, including 39% in Azure.
Operating profit was $38.4bn ($36.8bn expected), up 16%, driven by strong revenue growth and margin expansion.
Free cash flow fell 22% to $15.8bn off the back of higher investment. Net cash including lease liabilities ended the quarter $21.3bn. Over the quarter, the company returned $10.2bn in cash to shareholders.
Revenue in the coming quarter is guided to land between $86.7-87.8bn, with Azure expected to grow at 39-40% when ignoring currency moves.
The shares were broadly flat in after-hours trading.
Our view
Microsoft remains one of the cloud names investors are finding hardest to reward. Strong results were initially met with caution, before sentiment swung back towards neutral once management gave investors what they needed on the call - confidence that cloud growth still has legs. The message was simple: demand for cloud and AI is still running ahead of available capacity.
Azure remains the key engine of the investment case. AI services are making a larger contribution to cloud growth, and while Microsoft no longer gives a precise split, management’s comments suggest demand is broadening across both AI and more traditional workloads. Capacity remains the constraint, not demand, and that is a good problem to have.
The trade-off is investment. Microsoft is spending heavily on new infrastructure, and that will remain a drag on free cash flow in the near term. But this is still an exceptionally efficient business, generating significant cash even as it invests record amounts back into growth.
Microsoft has also taken a different route to some peers by leaning heavily on OpenAI, where it has a c.30% stake, rather than trying to shoulder the full cost of building a leading model stack alone. Whether that proves to be the perfect strategy is still up for debate. If AI models become more commoditised, Microsoft’s ability to plug leading models into its software ecosystem could be a major advantage.
If owning the model layer proves essential, Microsoft may not capture the full upside, even with its OpenAI exposure. For now, though, the strategy gives it a powerful position across both infrastructure and applications without having to fund every layer of the AI race on its own.
The software side of the business remains essential, and we’re starting to see signs that newer tools can support both pricing and engagement. Copilot had a poor start, but it’s quickly becoming a powerful tool, and adoption now looks to be building as model quality improves and the product becomes more deeply embedded across the Office suite. This is an area we think the market may still be underappreciating.
All in, Microsoft remains a best-in-class operator and one of our preferred names in tech and AI. We see scope for both near and long-term upside as cloud capacity continues to come online and AI tools gain traction.
There are risks. Software sentiment has weakened, with investors questioning whether AI could make some tools easier to replicate and whether pricing shifts from per-user models to usage-based models could pressure margins - valid concerns that we are monitoring closely.
Environmental, social and governance risk
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Microsoft’s overall management of material ESG issues is strong.
Microsoft’s deep pockets mean it’s able to spend $20bn in the coming few years to help combat the threat of cybersecurity attacks. At the same time, the group already has relatively robust analytics and oversight structures in place to help reduce this risk. That said, Microsoft’s handling of data has come under scrutiny in the past, and its huge scale means this risk remains material.
The author holds shares in Microsoft.
Microsoft key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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