Microsoft is gearing up to unveil its second-quarter earnings on Wednesday, right after the market closes. This comes at a time when investors are still grappling with the ripples created by DeepSeek’s recent disruption in the AI sector, affecting the tech giants of Silicon Valley.
In a bid to bolster their AI capabilities, Microsoft and its fellow tech behemoths are pouring billions into building the data centers and infrastructure necessary to support their AI-driven services. However, the release of China’s DeepSeek R1 model on January 20 has challenged the prevailing notion that developing AI models demands the most powerful—and costly—hardware. DeepSeek asserts that its model was trained using systems that are both less powerful and cheaper than what Microsoft-backed OpenAI, Google, and Meta can offer.
Last weekend, DeepSeek’s app skyrocketed to the top of the App Store, stirring significant interest in the relatively modest firm and delivering a blow to American AI stocks, including Nvidia, a key player in the field.
With these dynamics at play, Microsoft now faces the challenge of demonstrating that its investments in AI are translating into increased revenue, and that the substantial spending on infrastructure for AI is justified.
Looking ahead to this quarter, projections suggest Microsoft will report earnings per share of $3.13, based on a revenue estimate of $68.8 billion, according to Bloomberg consensus data. This compares to last year’s second-quarter figures, where the company posted an EPS of $2.93 on $62 billion in revenue.
Particularly noteworthy is Microsoft’s Commercial Cloud segment, which is projected to generate $41.1 billion in revenue, marking an improvement from the $31.9 billion reported in the same quarter last year. Additionally, its intelligent cloud business, which includes the Azure platform, is expected to show growth, up to $25.8 billion from $21.5 billion previously.
Analyst Brent Thill from Jefferies has expressed optimism about Azure’s prospects, suggesting that growth will pick up in the latter half of 2025. In his note to investors, he emphasized that “Our checks continue to indicate improving consumption/core cloud trends,” pointing out a significant Azure commitment from OpenAI to support its entire suite of products and training.
Despite the overall AI boom, Microsoft’s stock performance hasn’t kept pace with some of its rivals. Over the past year, Microsoft shares have risen just 5%, whereas Amazon and Google have seen their shares climb 44% and 26%, respectively.
Nonetheless, Evercore ISI analyst Kirk Materne suggests there may be opportunities for what he calls a “mini revenge trade.” As AI-related sales grow, Copilot adoption increases, and capital expenditures begin to level off, freeing up more cash, Microsoft’s position could strengthen.
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