Investors were disappointed with Microsoft’s Azure forecast, but the reaction looks overdone.
Microsoft’s (MSFT 0.99%) cloud computing platform Azure continued to be the growth driver for the stock when the software giant reported its fiscal Q1 earnings. However, the company’s guidance for Azure, while strong, left investors wanting more.
The decline in its share price following the report’s release on Wednesday leaves Microsoft stock up only around 10% on the year. Let’s take a closer look at the company’s results to see if this is a good opportunity to buy the dip.
Azure revenue accelerates
Azure was once again Microsoft’s growth engine, with year-over-year revenue growth of 33% (34% in constant currency), which was an acceleration from the 29% (30% in constant currency) growth it saw last quarter. The revenue growth was well above the 28% to 29% constant currency growth the company had previously forecast.
Microsoft credited the strong growth to Azure OpenAI usage, which has doubled in the last six months, as it helps customers build their own artificial intelligence (AI) agents and copilots. It also said that Azure AI is feeding into increased usage of its data and analytics services.
However, investors were disappointed that company management only forecasted Azure revenue to grow by 31% to 32% in constant currency in its fiscal Q2. This is despite the company saying growth would accelerate in the second half of its fiscal year as its prior capital expenditures (capex) create more capacity to meet the strong demand it is seeing.
Overall Intelligent Cloud revenue, where Azure resides, climbed 20% year over year to $24.1 billion.
Looking at Microsoft’s other segments, Productivity and Business Processes, which is where Office and LinkedIn reside, saw revenue jump 12% year over year to $28.3 billion. Dynamics 365 and Office 365 Commercial led the way with revenue growth of 14% and 13%, respectively, while LinkedIn revenue grew 10% and Office 365 Consumer revenue rose 5%.
Microsoft said its Copilot 365 AI agents continue to see swift adoption, with more than 70% of the Fortune 500 using the tools. Meanwhile, it said the adoption of copilots for ERP and CRM systems has been helping power the results at Dynamics.
Revenue in its More Personal Computing segment, home to Windows and Xbox, jumped 17% year over year to $13.2 billion. Microsoft’s recent acquisition of video game maker Activision helped power the results, while search and news advertising revenue was strong.
Overall, Microsoft’s revenue climbed 16% year over year to $65.6 billion, with earnings per share (EPS) up 10% to $3.30. The results were solidly ahead of analyst expectations, topping the consensus for $64.5 billion in revenue and $3.10 in EPS, as compiled by LSEG.
Looking ahead, Microsoft forecast its Intelligent Cloud segment to grow between 18% and 20% in constant currency, while its Productivity and Business Processes segment revenue is projected to increase by between 10% and 11% in constant currency. More Personal Computing is forecast to decline by 16% to 18%.
Image source: Getty Images.
Is it time to buy the dip?
While investors were disappointed with Azure guidance, the only thing that appears to be keeping growth back at the segment is capacity constraints, which the company is spending money on to alleviate. Meanwhile, Azure growth in the quarter came in much higher than it previously projected, so there is certainly room for it to outperform. Right now, though, Azure is a growth machine for Microsoft and there is no indication that it will slow down.
Meanwhile, its other businesses are, by and large, showing solid growth. GitHub continues to be strong, and the company has a huge opportunity with its Microsoft 365 copilots. The company recently introduced the newest versions of the AI agents that work with Office 365, and early uptake appears strong. Given the add-on’s price point of $30 per month per user for enterprise customers, this should be a big revenue driver for the company in the coming years.
The stock now trades at a forward price-to-earnings (P/E) ratio of under 27, which is below where it has traded for much of the year. That may not be on the clearance rack, but that’s an attractive valuation for a company with a solid recurring revenue stream and a lot of AI opportunities in front of it.
MSFT PE Ratio (Forward 1y) data by YCharts
Microsoft has already been a big AI winner with Azure, which looks like it should continue. Meanwhile, if AI can help supercharge growth for Office 365, then the stock has a lot more upside from here.
All in all, I think the market reaction to Microsoft’s earnings was an overreaction and this looks like a great opportunity for long-term investors to buy the stock on the dip.
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.
