Microsoft to Report Q2 Earnings Amidst AI Industry Shifts

Microsoft (MSFT) is set to report its second-quarter earnings after the market close on Wednesday, as Wall Street evaluates the impact of DeepSeek’s recent developments on the AI industry and the broader tech sector. Microsoft, alongside other tech giants, has been heavily investing in data centers and infrastructure to support AI software deployment across various services. However, China’s DeepSeek has challenged the prevailing notion that developing AI models necessitates the use of the most powerful and expensive chips. The company’s R1 model, released on January 20, was reportedly trained on less powerful and less costly systems compared to those used by American rivals such as Microsoft-backed OpenAI, Google (GOOG, GOOGL), and Meta (META).

DeepSeek’s model quickly rose to the top of the App Store, generating significant interest in the relatively small firm and negatively impacting American AI stocks, including AI leader Nvidia. Microsoft now faces the challenge of demonstrating that its substantial infrastructure investments are justified and that its AI initiatives are yielding increased revenue.

For the quarter, Microsoft is expected to report earnings per share (EPS) of $3.13 on revenue of $68.8 billion, according to Bloomberg consensus data. This would represent an increase from the $2.93 EPS on $62 billion in revenue reported in the same quarter last year. Microsoft’s Commercial Cloud segment revenue, which includes cloud services sales, is anticipated to reach $41.1 billion, up from $31.9 billion in Q2 last year. The intelligent cloud business, including Azure, is expected to report $25.8 billion in revenue, up from $21.5 billion.

Jefferies analyst Brent Thill believes Azure growth will begin to reaccelerate in the second half of 2025, citing improving consumption and core cloud trends. Microsoft’s recent announcement of a new, large Azure commitment by OpenAI to support all OpenAI products and training further underscores the platform’s growing importance.

Despite being a major beneficiary of the AI boom, Microsoft’s stock price has not kept pace with its competitors. Over the last 12 months, Microsoft shares have risen by just 5%, compared to 44% for Amazon (AMZN) and 26% for Google. However, Evercore ISI analyst Kirk Materne suggests that Microsoft’s stock could experience a “mini revenge trade” as AI sales increase, Copilot adoption improves, and capital expenditure moderates, leading to more free cash flow.

Microsoft is also aiming to boost PC sales with its Copilot+ PC lineup, which is designed to run AI applications natively rather than via the cloud. While AI PCs offer potential benefits, the primary driver for consumer upgrades remains hardware improvements such as enhanced performance and power efficiency.