Microsoft’s Upcoming Earnings Report: A Key Look at AI Growth

A new quarterly earnings season has commenced in corporate America. Next week, some of the “Magnificent Seven” technology firms, which encompass nearly one-third of the S&P 500 (SNPINDEX: ^GSPC), will share their results. Investors on Wall Street are especially keen to understand these companies’ advancements in artificial intelligence (AI), as this could significantly affect their future earnings.

Microsoft’s Focus on AI Features in Upcoming Report

On January 29, Microsoft (NASDAQ: MSFT) will announce results for its fiscal 2025 second quarter, which closed on December 31. Investors are particularly interested in the company’s ability to monetize its growing array of AI products and services, with one specific figure standing out as crucial.

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Updates on AI Products Expected from Microsoft

Microsoft has made substantial investments in OpenAI, the creator of ChatGPT, leveraging its technology to advance its AI initiatives. For instance, OpenAI’s models are foundational to Microsoft’s Copilot virtual assistants, which are embedded in key software products such as the Windows operating system, Bing search engine, and Edge browser.

Customers of Microsoft’s 365 productivity suite can opt to add Copilot for an additional fee, enabling faster text and image generation within applications like Word, Excel, and PowerPoint. With over 400 million 365 licenses used by organizations globally, this represents a significant potential subscriber base for Copilot.

In the fiscal 2025 first quarter, Microsoft reported that 70% of Fortune 500 companies were already utilizing Copilot for 365, with daily usage more than doubling in just three months. Upcoming updates during next week’s report will be crucial, as this could become a major revenue stream for Microsoft.

Azure Cloud Platform to Take Center Stage

The Azure cloud platform will once again dominate Microsoft’s quarterly report, with Azure AI playing a vital role. Azure has become the go-to platform for businesses looking to deploy AI, offering state-of-the-art data centers and access to large language models (LLMs) from leading providers like OpenAI. These components are essential for developing AI applications.

A Critical Metric for Investors

Historically, Azure has been the fastest growing segment within Microsoft. In the fiscal first quarter, revenue from Azure rose by 33% year over year, significantly outpacing Microsoft’s overall revenue growth of 16%.

Azure AI contributed 12 percentage points to Azure’s impressive 33% revenue growth during the first quarter, which marked a record high. This is a considerable increase from only 5 percentage points in the previous year.

During the fiscal 2025 first quarter, Microsoft dedicated $20 billion to capital expenditures, most of which aimed at developing AI-capable data centers. This followed an even greater investment of $55.7 billion in fiscal 2024.

Tracking the revenue generated by Azure AI will give investors insight into the returns Microsoft is realizing from this significant expenditure. A continued increase in Azure AI’s contribution signals that businesses are enhancing their investments in AI processing and LLMs.

Why Microsoft’s AI Investments Must Yield Results

Presently, Microsoft stock has a price-to-earnings (P/E) ratio of 35.4, displaying a 7.5% premium over its 10-year average of 32.9. This also exceeds the tech-heavy Nasdaq-100 index, which is at a P/E ratio of 32.5.

MSFT PE Ratio data by YCharts.

In other words, Microsoft stock is currently pricier than usual. The large investments in AI infrastructure are impacting earnings, raising concerns among investors who may resist supporting Microsoft’s high valuation if substantial quarterly benefits are absent.

Should Azure AI’s contribution to revenue start to decline, it could shift investor sentiment significantly, potentially leading to a drop in Microsoft stock prices. Therefore, this specific metric is crucial for investors to monitor on January 29.

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Anthony Di Pizio 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.