Microsoft’s Azure Fuels Growth as Stock Takes a Hit

Microsoft’s (NASDAQ: MSFT) cloud computing platform Azure emerged as the main growth contributor when the software giant released its fiscal Q1 earnings. However, investors found the guidance for Azure less impressive, leading to a decrease in its share price post-report. Microsoft’s stock has increased by only around 10% this year. Is this a chance to buy the dip?

Azure Revenue Soars

Azure’s revenue grew by 33% year over year (34% in constant currency), continuing its role as Microsoft’s growth engine. This marks an increase from the previous quarter’s 29% (30% in constant currency). The revenue growth exceeded the company’s prior forecast of 28% to 29% in constant currency.

The robust growth is attributed to the rising use of Azure OpenAI, which has doubled in the last six months. This service aids customers in developing their artificial intelligence (AI) agents and tools. Additionally, Azure AI has bolstered the demand for its data and analytics services.

Despite Azure’s strong growth, investors were disappointed with management’s projection of a 31% to 32% revenue growth in constant currency for fiscal Q2. Management indicated growth would pick up in the latter half of the fiscal year as past capital expenditures enhance capacity to meet rising demand.

Overall Intelligent Cloud revenue, which includes Azure, grew 20% year over year, reaching $24.1 billion.

In other segments, Revenue from Productivity and Business Processes, which encompasses Office and LinkedIn, soared by 12% year over year to $28.3 billion. Dynamics 365 and Office 365 Commercial were key drivers, with revenue growth of 14% and 13%, respectively. LinkedIn revenue increased by 10%, while Office 365 Consumer saw a 5% rise.

Microsoft reported that its Copilot 365 AI agents are rapidly gaining traction, with more than 70% of Fortune 500 companies now using these tools. The adoption of copilots for Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) systems has also fueled growth at Dynamics.

The More Personal Computing segment, which includes Windows and Xbox, experienced a 17% year-over-year revenue increase to $13.2 billion. This growth was partly driven by Microsoft’s recent acquisition of video game maker Activision, along with strong advertising revenue from search and news platforms.

Overall, Microsoft reported a revenue increase of 16% year over year to $65.6 billion, with earnings per share (EPS) rising 10% to $3.30. These figures exceeded analyst expectations, surpassing the consensus estimates of $64.5 billion revenue and $3.10 EPS, according to LSEG.

Looking forward, Microsoft forecasts its Intelligent Cloud segment to grow between 18% and 20% in constant currency. Meanwhile, the Productivity and Business Processes segment is expected to rise by 10% to 11% in constant currency. However, More Personal Computing is projected to decline between 16% and 18%.

Image source: Getty Images.

Should You Consider Buying Now?

The market’s reaction to the Azure guidance seems overly cautious. Capacity limitations appear to be the main drawback to further growth in this segment, but Microsoft is actively addressing this issue. Given the higher-than-expected performance in the latest quarter, there’s potential for Azure to continue thriving. For now, Azure remains a significant growth driver for Microsoft, showing no signs of slowing down.

Additionally, other areas within the company are also performing well. GitHub maintains strong growth, while there are substantial future prospects tied to Microsoft 365 copilots. The company recently launched updated versions of these AI agents for Office 365, and early engagement appears promising. With an attractive price point of $30 per month for enterprise clients, this offers considerable revenue potential in the coming years.

The stock currently trades at a forward price-to-earnings (P/E) ratio below 27. Although not the lowest price, this represents a solid valuation for a company with a reliable recurring revenue stream and significant AI opportunities on the horizon.

MSFT PE Ratio (Forward 1y) data by YCharts

As it stands, Microsoft has already achieved significant success with Azure, and if AI propels growth in Office 365 as expected, the stock could see considerable gains ahead.

Overall, the market’s response to Microsoft’s earnings appears to be an overreaction, creating a favorable opportunity for long-term investors to consider purchasing on the dip.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.