Microsoft accelerates AI growth with strategic partnership

Microsoft Corporation announced its Q3 25 earnings on April 30,2025, with both solid sales and operating income. This performance was driven by robust growth in its cloud and AI businesses, with significant growth in Azure revenue and cloud services. In addition, the company experienced an increased adoption of AI tools like Microsoft 365 Copilot.

Microsoft Corporation was founded in 1975 and is headquartered in Redmond, Washington. It is a global technology company that develops, licenses, and supports a wide range of software products, services, and devices. Its offerings include server products and cloud services, MS 365 commercial products, Azure cloud services, Windows operating systems, Surface devices, Xbox gaming consoles, and services like Bing and GitHub. This company’s products are extensively used across commercial, consumer, and government sectors, making it a cornerstone of modern digital infrastructure.

The company operates in three distinct segments- Productivity and Business Processes (42.7% of Q3 25 net sales), Intelligent Cloud (38.2%), and More Personal Computing (19.1%). In addition, the company is also geographically segmented: United States (51.5% of Q3 25 net sales) and other countries (48.5%).

Cloud and AI fuels Q3 25 growth

Microsoft delivered a strong Q3 25 performance with net sales of $70.1bn, reflecting a 13.3% y/y increase, driven by continued demand for the company’s differentiated offerings. Revenue in Productivity and Business Processes posted 10% y/y growth, reflecting robust growth in MS 365 Commercial products and cloud services, MS 365 Consumer products and cloud services revenue, followed by LinkedIn, and dynamic products and cloud services. Likewise, revenue in Intelligent Cloud witnessed a 21% y/y growth followed by 6% y/y revenue growth in more Personal Computing.

Operating income rose to $32bn, reflecting a 16% y/y increase, with margins expanding by 108bp to 45.7% in Q3 25. Net income rose to $25.8bn, reflecting a 17.6% y/y growth.

Strategic partnership boosting AI innovation

On May 28, 2025, Microsoft and Yotta announced a strategic partnership aimed at propelling AI innovation in India. This collaboration will engage participants from IndiaAI to accelerate advancements in the country's AI ecosystem. By integrating Microsoft Azure AI services with Yotta’s Shakti Cloud, the partnership promises ultra-low latency computing for real-time AI applications across various sectors, including healthcare, finance, retail, and manufacturing.

This initiative underscores Microsoft’s dedication to promoting responsible AI adoption and inclusive digital transformation. It also aligns with the company's broader vision of ensuring safety, privacy, and copyright protection in its products. The partnership marks a significant milestone in advancing AI capabilities and fostering technological growth in India.

Robust financial momentum

Microsoft reported a strong topline performance over FY 21-24, posting a revenue CAGR of 13.4%, reaching $245bn in FY 24, driven by strong growth in intelligent cloud segment and productivity and business processes segment. EBIT rose at a CAGR of 16.1% to $109bn in FY 24, with margins expanding from 41.6% to 44.6%. Net income increased at a CAGR of 12.9% to $88.1bn.

A steady growth in net income led to FCF increasing from $42.8bn in FY 21 to $58.6bn in FY 24, boosted by operational efficiency and strong cash generation across its core businesses. Cash and cash equivalent rose from $14.2bn to $18.3bn. The company also witnessed a significant improvement in total debt-to-equity from 58% at end-FY 21 to 36.5% at end-FY 24.

In comparison, Alphabet Inc., a local peer, reported a slightly lower revenue CAGR of 10.8% over the past three years, reaching $350bn in FY 24. EBIT rose at a CAGR of 13.2% to $114bn in FY 24, with margins expanding from 30.6% to 32.6% in FY 24. Net income rose at a CAGR of 9.6% to $100bn.

Looking ahead, analysts’ estimate EBIT CAGR of 14.4% over FY 24-27, reaching $163.9bn, with margins expanding by 51bp to 45.2% in FY 27. In addition, analysts project a net profit CAGR of 13.9%, reaching $130.4bn, with a margin of 35.9%, with EPS expected to increase to $17.7 in FY 27 from $11.8 in FY 24. Likewise, analysts estimate an EBIT CAGR of 13.2% and a net profit CAGR of 11.8% for Alphabet Inc. over the same period.

Strong stock returns

Over the past 12 months, the company’s stock has delivered returns of approximately 20.5%. This beats Alphabet Inc. stock's lower returns by 14.7% over the same period.

Microsoft is currently trading at a P/E of 38.2x, based on the FY 25 estimated EPS of $13.4, which is higher than its 3-year historical average of 33.2x and Alphabet Inc.’s valuation of 19.4x. The company is currently trading at an EV/EBIT multiple of 29.8x, based on the FY 25 estimated EBIT of $126.1bn, which is higher than its 3-year historical average of 26.7x and Alphabet Inc. (17.3x).

Microsoft is liked by almost all of the 58 analysts who monitor it: 53 have ‘Buy’ ratings and five have ‘Hold’ ratings for an average target price of $547.12, implying a 6.8% upside potential from the current price.

Overall, the company is well-positioned to execute its long-term strategy by capitalizing on its leadership in cloud and AI-technologies and maintaining strong financial performance. Consistent revenue and earnings growth backed by robust FCF supports its investment appeal. However, the company is exposed to some risks including fierce competition, FX fluctuations, geopolitical tensions, and regulatory scrutiny.