Microsoft (MSFT) delivered a record-breaking quarter, with cloud and artificial intelligence (AI) momentum pushing the tech giant’s growth to new heights. The fiscal third quarter showcased double-digit growth across revenue and earnings, with strong performance in cloud computing, commercial services, and gaming. Both revenue and earnings exceeded Wall Street expectations, demonstrating Microsoft’s ability to deliver consistent top- and bottom-line growth.

Valued at $3.2 trillion, MSFT stock is up 3.3% year-to-date, outpacing the tech-heavy Nasdaq Composite Index’s ($NASX) dip of 8.2%. Wall Street expects Microsoft’s legacy to be sustained by its strong foundation in cloud computing and AI. With the stock down 7% from its 52-week high, long-term investors may be able to profit from buying the dip.

Microsoft Cloud: The AI Engine Driving Growth

In the third quarter of its fiscal 2025, total revenue of $70.1 billion increased 13% year-over-year, with earnings per share (EPS) rising 18% to $3.46. Microsoft’s gross margin stood at 69%, down one point from the previous quarter as a result of scaling its AI infrastructure. Commercial remaining performance obligations (RPO) increased 34% to $315 billion, with 40% expected to be recognized as revenue within the next 12 months. 
During the earnings call, CEO Satya Nadella attributed the strong performance to Microsoft’s continued position as the go-to infrastructure provider for global digital transformation. Revenue from its Cloud business stood at $42.4 billion, a 20% year-over-year increase. Nadella stated that “Cloud and AI are the essential inputs for every business,” and the numbers back that up. Microsoft is rapidly scaling across the AI stack. Customers from various industries are migrating to Azure, leveraging Microsoft’s breadth of cloud-native and mission-critical workflows. 

The company stated that AI revenue once again exceeded projections, thanks to increased customer adoption and strategic deals, including OpenAI’s significant Azure commitment. Azure is ranked second in the global cloud computing market, with a 21% market share, trailing Amazon’s (AMZN) AWS’s 30% market share. 

Revenue from the Productivity and Business Processes segment rose 10% year-over-year to $29.9 billion. Furthermore, Azure’s strong momentum was reflected in AI and non-AI workloads performing well in the quarter. This resulted in a 21% increase in Intelligent Cloud segment revenue to $26.8 billion, driven by 33% growth in Azure and other cloud services. Revenue from the More Personal Computing segment rose 6% to $13.4 billion. Gaming revenue rose 5%, with Xbox content and services up 8% due to strong first- and third-party titles.

Microsoft continues to make aggressive investments in cloud and AI infrastructure. Capital expenditures amounted to $21.4 billion in Q3. Nonetheless, the company generated $20.3 billion in free cash flow and distributed $9.7 billion to shareholders through dividends and share repurchases.

A Bullish Outlook for the Future

Microsoft anticipates continued growth in Q4 and beyond, despite macroeconomic headwinds. The More Personal Computing segment is expected to decline by 19% to 22% due to pressure on OEM and device sales. However, it could be offset by an 11% to 12% increase in the Productivity and Business Processes segment. Furthermore, Azure’s 34% to 35% growth could boost Intelligent Cloud segment revenue to $28.7 billion to $29.05 billion, up 41% to 43% year on year.

Microsoft Cloud’s gross margin may remain under pressure at around 67% due to ongoing AI investment. Despite the fact that AI demand is outpacing near-term capacity, management emphasized ongoing investment discipline and operational agility. 

Analysts covering Microsoft expect revenue and earnings to grow by 13.7% each for the fiscal year 2025. Furthermore, in fiscal 2026, revenue and earnings are expected to increase by 13.4% and 12.4%, respectively. Microsoft stock is currently trading at 28 times forward earnings, compared to a five-year historical average of 31.2x. 

What Is Wall Street’s Take on MSFT Stock?

Following the results, CMB International Securities analyst Saiyi He reaffirmed Microsoft’s “Buy” rating, citing the tech giant’s robust Q3 fiscal 2025 results and strong growth trajectory. He also stated that demand for AI infrastructure exceeds current data center capacity, indicating long-term growth potential. Despite rising AI investments putting pressure on cloud margins, Microsoft’s overall operating margin increased due to improved efficiencies and performance in other areas of the business. The analyst also raised the target price to $510.30 from $503.

DBS analyst Andy Yu has taken a similar stance, emphasizing the company’s dominant position in productivity software as well as its growing opportunities in cloud and AI. Yu also cited Microsoft’s strategic AI investments and cybersecurity expertise as key long-term growth drivers. Despite short-term macroeconomic headwinds, the Activision acquisition may improve Microsoft’s performance in the PC and gaming markets. Yu set a target price of $485 for Microsoft.

On Wall Street, MSFT stock is a “Strong Buy.” Of the 46 analysts covering the stock, 38 rate it a "Strong Buy,” four rate it a “Moderate Buy,” and four say it is a “Hold.” The average analyst target price of $505.3 suggests the stock has upside potential of 16% from current levels. Plus, its high target price of $600 implies that the stock could rise as much as 37.5% from current levels.

Microsoft’s Q3 results reflect its dominant position in cloud computing and AI. Thanks to its diverse business model, robust cloud growth, consistent commercial momentum, and expanding AI monetization, Microsoft appears to be well-positioned to sustain long-term growth despite a volatile macroeconomic environment. I agree with Wall Street’s optimism that MSFT remains a “Strong Buy.”