Microsoft (MSFT) Pre-earnings Analysis
Even after decades as a company, Microsoft is still performing like a high growth stock and finding ways to reinvest itself.
The most prominent example of the company’s adaptive approach their transformation from their Windows business to the cloud-first ideology. Microsoft explicitly pivoted its business towards Azure, which has been an absolute success. Azure is now the backbone of Microsoft’s growth and competes directly with AWS. It’s a high margin business that’s based on longer term contracts, which gives them a ton of revenue visibility.
Microsoft’s second pivot in recent years was into artificial intelligence. The company didn’t just introduce AI as an add-on, they embedded it across all its products (that’s the benefit of being a consumer facing company). Both consumer and enterprise customers of Microsoft got real-time access to the company’s AI solutions, which gives Microsoft leverage given the focus on AI.
For these earnings in specific, the focus will again be on cloud revenue growth, but also on the company’s AI infrastructure spending. Microsoft plans to spend $80 billion on building and expanding AI enabled data centers, which may weigh down the company’s profit outlook. Like many other tech stocks, investors are eager to hear about a path to a point where this spending begins to show a return on investment.
At $3.56 trillion, Microsoft has grown to be the fourth largest company in the world by market cap, which means the bar is set high. The last two quarters showed 18% revenue growth, anything less may scare investors. Net income will also be under scrutiny given the massive AI Capex. We can see that traders sold the stock off in the last three months that led up to this week’s scheduled earnings, perhaps because uncertainty around growth and AI spend is weighing down sentiment. But Microsoft has the chance to prove the doubters wrong if it meets and exceeds expectations.
One final note:
Microsoft has also recently pivoted to the advertising space. The company’s ad tech was supercharged by their acquisition of Xandr 2022 and it earned them a partnership with Netflix. Microsoft because the exclusive partner of Netflix’s ads for the ad tier, which reflected 2.5x growth in 2025 (per Netflix’s data). This is a promising signal for Microsoft’s revenue opportunity in advertising. Although that exclusive partnership has since changed, Microsoft showed it can handle large scale ads and it can land more clients, growing another source of revenue. Something to watch for on these earnings.
Option chain analysis:
Microsoft’s options expiring on 01/30 currently have a 87% implied volatility reading, which translates to about a (+/-) $24 move from the stock. The direction will depend on earnings results.
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