How Could Microsoft’s Q2 FY2025 Results Turn Out for Investors?

TradingKey - Big Tech’s week of big earnings releases is coming soon, and it kicks off with one of the world’s most valuable companies – Microsoft Corporation (NASDAQ: MSFT).

The office productivity software, cloud computing, and gaming giant didn’t have a stellar 2024. Indeed, its share price advanced only 12.1% during the year and Microsoft was the only “Magnificent Seven” company that didn’t outperform the S&P 500 Index’s 23.3% rise over the same period.

Investors will be hoping for some better numbers and clear monetisation routes for its investments into Artificial Intelligence (AI) so far.

Microsoft is set to report its Q2 FY2025 earnings (for the three months ending 31 December 2024) on Wednesday (22 January) after the market close. Here’s what investors should be watching as we head into this crucial earnings period.

Capital expenditures once more in focus

For all the big cloud computing firms reporting this quarter, one of the key numbers on the agenda will be capital expenditure (capex). It wasn’t always this way, with many tech giants having minimal capex requirements pre-ChatGPT. 

As a result of the skyrocketing demand for computing power, Microsoft is just one of the many big data centre users that have undertaken a rapid buildout of its capacity. That also happens to cost a lot of money to do.

Capex for Microsoft in its most recent quarter – Q1 FY2025 – hit a record high of US$14.9 billion, up a whopping 50% year-on-year. During the same report, Microsoft also stated that it hasn’t been able to meet demand from clients due to constraints on the data centre front and guided that it expects that to continue in Q2 FY2025.

Investors will be keen to hear more updates on both the capex plans going forward and the potential for any easing in that demand-supply imbalance.

Revenue guidance relatively muted; watch Azure

Heading into this earnings release, expectations for Microsoft aren’t that high. The company had already guided for Q2 FY2025 revenue of between US$68.1 billion and US$69.1 billion, representing just 10.6% year-on-year growth at the midpoint of the range.

While that was slightly below expectations, any revenue beat from Microsoft will have to be followed up with robust growth in other areas too.

This mainly applies to Microsoft’s Azure service, its cloud computing unit, which posted 34% year-on-year revenue growth in Q1 FY2025. Management at Microsoft had guided for Azure growth of between 31% and 32%, mainly on that aforementioned demand-supply mismatch.

However, if Microsoft manages to surprise to the upside with faster-than-expected Azure growth, investors could easily see more optimism surrounding the company.

Eyes on AI monetisation and Copilot

Given the vast amounts of capital Microsoft is putting towards AI initiatives, investors are understandably impatient and they want to see concrete revenue being generated from these. 

One of the key reasons for its underperformance last year was that Microsoft failed to convince investors that it was doing this. Tepid adoption rates for its Microsoft Copilot AI offering for businesses ha resulted in some of the AI hype surrounding the company cool.

For consumers, Google Gemini and Meta AI have proven to be more popular hits than Microsoft Copilot but the company is rolling out new features for its business users. One such announcement came last week as Microsoft unveiled a chat service that would allow businesses to utilise on-demand AI agents for routine tasks.

At the same time, Microsoft also announced a 30% price hike for its suite of Office apps that come with access to AI tools. Accelerating that pace of adoption for its AI-assisted Office suite will be key for the company in the quarters ahead.

So far in 2025, Microsoft shares are up 2.5% and are slightly outpacing the 2.2% return from the S&P 500 Index over the same period.