Microsoft (MSFT) Gears Up to Meet Soaring Expectations

Business Insider

30-07-2025

U.S. tech giant Microsoft (MSFT) is about to make a market splash through its Q2 earnings announcement, due after tomorrow's market close. Tomorrow, the tech bellwether is set to report another strong quarter, with very little skepticism from the market, as the stock trades near all-time highs. But for a company of Microsoft's stature, especially as one of the main drivers behind the AI revolution, it's not enough to just beat estimates. The company needs to exceed them by a meaningful margin and raise guidance to justify its premium valuation multiples based on steady growth.
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With MSFT stock decoupling from the S&P 500 (SPX) since the start of the year, justifying the long-term bullish thesis for MSFT becomes a no-brainer.
The good news is that if any company can maintain steady and robust growth, it's Microsoft. Backed by a sum-of-the-parts approach—even with conservative growth assumptions—there appears to be upside for the stock, even at these historical peaks. That said, I see MSFT stock as a strong Buy.
Evaluating Microsoft Stock in Detail
For starters, one way to determine whether Microsoft's current share price is fairly valued is by conducting a 'sum-of-its-parts' analysis. It's a bit speculative, of course. However, we can still use a reasonable framework—estimating the fair value of its three main business segments: (1) Productivity and Business Processes, which includes Microsoft Office, LinkedIn, and Dynamics. This segment is known for its high margins and moderate growth. (2) Intelligent Cloud, home to Azure and enterprise services. It's been Microsoft's fastest-growing segment, also with strong margins—but it comes with heavier CapEx spending; and (3) More Personal Computing, which covers Windows, Surface, Xbox, and Bing. This one has slower growth and is more cyclical in nature.
For Microsoft's fiscal year 2025, which ends this June, analysts are forecasting total revenue of $279 billion—roughly a 14% increase from the previous year. So far, over the first nine months of FY25, Microsoft has reported $205.2 billion in revenue. That implies an estimated $73.81 billion for Fiscal Q4—also around 14% higher year-over-year.
Using the higher-end of Microsoft's Q4 outlook and adding it to what's already been reported, we estimate full-year revenues to break down like this: $120 billion from Productivity & Business Processes, $105.4 billion from Intelligent Cloud, and $54 billion from More Personal Computing—adding up to the projected $279 billion in total revenue.
What Microsoft's Valuation Really Shows
Under the base-case scenario for Fiscal 2025, the productivity segment is expected to post a solid 54% year-over-year gain, while Intelligent Cloud is expected to hold steady with flat growth, and More PC is expected to decline by about 13%. Assuming operating margins remain consistent with what we've seen over the past nine months, we would expect to see ~58% for Production. & Business, 42.5% for Intelligent Cloud, and around 26.5% for More PC.
With that in mind, it is possible to obtain a grounded five-year projection for Microsoft's three main segments. I'm assuming a 5-year revenue CAGR of 12.5% for both Prod. & Business and Intelligent Cloud, and a more modest 2% CAGR for More PC. On margins, Prod. & Business improves by 1.5% per year, Intelligent Cloud by 2.3%, while More PC stays flat. I'm applying a WACC of 7% for Prod. & Business and Intelligent Cloud—given their more stable, recurring-revenue profiles—and 8.5% for More PC, considering its higher cyclicality and risk.
With a perpetual growth rate assumption of 3%, and CapEx at 4% of revenues for Prod. & Business, the implied enterprise value comes in at around $2.4 trillion. For Intelligent Cloud, assuming a capital expenditure (CapEx) ratio of 14% of revenues, the valuation comes out to approximately $1.6 trillion. More PC, using a 5% capital expenditure (CapEx) rate, would be valued at roughly $425 billion.
Add it all up—and tack on Microsoft's net cash position of $25.4 billion—and we arrive at an estimated equity value of $4.275 trillion. That's about 12% upside from the company's current market value of $3.82 trillion.
In my view, this kind of breakdown helps put Microsoft's seemingly rich traditional multiples into better perspective— such as its P/E of 39.7x, which is approximately 2.7x above the sector average. At first glance, that might seem stretched, but when you break it down, it actually aligns pretty well with the company's growth trajectory. No wild assumptions, just solid fundamentals.
What the Market Needs to Hear from Microsoft Tomorrow
That said, with earnings news just hours away, I believe that to truly appease the market—which means posting growth metrics in line with or above what the previous valuation exercise implies—Microsoft needs to do four things: beat revenue and EPS estimates, exceed quarterly guidance, and raise forward guidance above current expectations.
To back the bullish thesis on the stock, a positive update on the company's commercial bookings will be crucial in reinforcing confidence in long-term growth. For instance, remaining performance obligations totaled $235 billion in Q3 of fiscal 2024—and that number jumped to $315 billion in Q3 of fiscal 2025, primarily driven by AI deals and Microsoft's close partnership with OpenAI and ChatGPT.
Another key point that I believe could be just as important is an update on Microsoft's aggressive spending on AI infrastructure. The company has guided for $80 billion in CapEx for 2025, and investors will be looking for clarity around that figure. Higher spending tends to weigh more heavily on the Intelligent Cloud segment early on. It can have a significant impact on Microsoft's equity value, depending on whether capital expenditures (CapEx) increase or decrease. However, a reduction in spending could also be interpreted as a sign that expected future demand may be cooling, which isn't necessarily ideal either. In this context, I would actually view an increase in CapEx more positively than a pullback.
Is Microsoft a Buy, Hold, or Sell?
Wall Street analysts are overwhelmingly bullish on MSFT going into tomorrow's earnings bombshell. In the last three months, out of 33 experts covering the stock, 30 are bullish, while only three are neutral. Not a single analyst is currently bearish. Meanwhile, MSFT's average stock price target of $558.71 implies ~9% upside potential over the coming year.
Steady Growth Supports Microsoft's Upside
Analyzing Microsoft's business segments individually, the consistent performance across its core operations points to steady growth in both revenue and earnings. This underpins a favorable outlook for the stock, even as it trades near record highs. The upcoming Q2 results are unlikely to expose any structural weaknesses that would materially challenge the bullish thesis. Given these factors, MSFT remains a Buy at current levels.