Technology giant Microsoft (NASDAQ: MSFT) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 18.4% year on year to $77.67 billion. Its GAAP profit of $3.72 per share was 1.5% above analysts’ consensus estimates.

Is now the time to buy MSFT? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Microsoft’s Q3 results exceeded Wall Street’s revenue and profit expectations, but the market responded negatively due to concerns about the sustainability of recent growth and the company’s heavy investment in AI infrastructure. Management attributed the quarter’s outperformance to strong adoption of AI-powered products, including its Copilot suite and Azure AI services, as well as robust commercial bookings growth. CEO Satya Nadella highlighted, “We are seeing increasing demand and diffusion of our AI platform and family of Copilots, which is fueling our investments across both capital and talent.”

Looking forward, Microsoft’s guidance is shaped by accelerating demand for its cloud and AI offerings, with management signaling that capacity constraints will persist into next year. CFO Amy Hood explained, “We now expect to be capacity constrained through at least the end of our fiscal year,” pointing to ongoing infrastructure investments and prioritization of high-value workloads. Management plans to balance Azure’s capacity expansion with continued AI product enhancements, aiming to capture durable revenue growth while managing potential risks tied to customer concentration and infrastructure utilization.

Key Insights from Management’s Remarks

Management credited Q3 performance to rapid adoption of Copilot and AI services, elevated commercial demand, and expanded partnerships, but flagged ongoing supply limitations for Azure as a headwind.

• Copilot suite adoption: Microsoft’s family of Copilots (across information work, coding, security, science, health, and consumer) surpassed 150 million monthly active users, with enterprise customers rapidly increasing seat purchases and usage intensity growing by 50% quarter-over-quarter. Nadella noted, “Copilot is becoming the UI for the agentic AI experience,” highlighting integration across Office applications and strong customer feedback.

• Azure AI infrastructure scaling: The company is expanding its AI data center footprint by over 80% this year and doubling capacity over two years to accommodate surging demand. New deployments, such as the Fairwater data center and NVIDIA GB300 clusters, were highlighted as key enablers for both Microsoft and partners like OpenAI.

• Commercial bookings momentum: Commercial bookings grew 112%, driven by multi-year commitments from large customers, including an incremental $250 billion Azure commitment from OpenAI announced this quarter. Hood emphasized that most of these bookings have a short average duration, reflecting real near-term usage rather than speculative long-term contracts. These results do not include any impact from the incremental $250 billion Azure commitment from OpenAI announced yesterday.

• Capacity constraints affecting Azure: Despite bringing more capacity online, management acknowledged that Azure remains supply-constrained due to high demand for both third-party and Microsoft’s own AI applications. Hood stated, “We have been short in Azure, and we’ve been clear on it. Demand is increasing across many places.”

• Investment in short-lived and long-lived assets: The company is balancing short-lived investments in GPUs and CPUs with long-lived data center infrastructure, aligning asset lifespans with expected contract durations. Hood described that roughly half of this quarter’s spend was on short-lived assets, which helps reduce risk from overbuilding and ensures assets are matched to business needs.

Drivers of Future Performance

Microsoft expects its near-term outlook to be shaped by persistent AI-driven demand, ongoing infrastructure expansion, and careful management of capacity constraints.

• AI platform and Copilot expansion: Management expects continued growth from the Copilot suite and Azure AI services, with enterprise adoption accelerating and new product features driving higher average revenue per user (ARPU). Nadella cited internal data showing that Copilot is becoming “the organizing layer for agents to help customers.”

• Capacity and supply limitations: Ongoing constraints on Azure capacity are expected to impact cloud revenue growth, as Microsoft must prioritize high-value workloads and first-party AI applications. Hood indicated that these constraints will persist into next year despite aggressive infrastructure investment.

• Customer concentration and contract risk: Management addressed analyst questions about the large size of some recent contracts and the risk of customer concentration. Both Nadella and Hood emphasized the importance of portfolio diversification and fungibility of infrastructure, and monitoring contract delivery schedules as mitigation, but did not characterize this as a present risk.

Catalysts in Upcoming Quarters

Looking ahead, our analyst team will closely monitor (1) the pace at which Microsoft alleviates Azure’s capacity constraints and brings new AI infrastructure online; (2) sustained adoption and monetization of Copilot across enterprise and consumer segments; and (3) diversification of commercial bookings, especially as large contracts with AI-native firms become a bigger part of the company’s backlog. Execution on infrastructure scaling and customer mix will be central to Microsoft’s growth trajectory.

Microsoft currently trades at $525.51, down from $542.66 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

Stocks That Trumped Tariffs

Trump’s April 2025 tariff bombshell triggered a massive market selloff, but stocks have since staged an impressive recovery, leaving those who panic sold on the sidelines.

Take advantage of the rebound by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.

StockStory is growing and hiring equity analyst and marketing roles. Are you a 0 to 1 builder passionate about the markets and AI? See the open roles here.