Microsoft (MSFT) will report its second quarter earnings after the bell on Wednesday as Wall Street continues to digest the fallout surrounding DeepSeek’s impact on the AI industry and Silicon Valley’s tech titans.
Microsoft and its Big Tech cohort are investing tens of billions of dollars in the data centers and infrastructure needed to train and deploy AI software across their various services. But China’s DeepSeek upended the general thinking that developing AI models requires the use of the most powerful, and expensive, chips with the release of its R1 model on Jan. 20.
The model, the company claims, was trained on systems that were less powerful and less expensive than those produced by American rivals like Microsoft-backed OpenAI, Google (GOOG, GOOGL), and Meta (META).
The company’s app shot to the top of the App Store over the weekend, driving a huge amount of interest in the relatively small firm and clobbering American AI stocks, including AI bellwether Nvidia.
Now Microsoft will have to prove not only that its own AI work is paying off in terms of increased revenue but also that its hefty infrastructure investments are truly necessary.
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. The company reported EPS of $2.93 on revenue of $62 billion in the same quarter last year.
Importantly, Microsoft’s Commercial Cloud segment revenue, which includes cloud services sales, is expected to come in at $41.1 billion. That would be an increase from the $31.9 billion the company reported in Q2 last year. Its intelligent cloud business, which includes its Azure platform, is set to come in at $25.8 billion, up from $21.5 billion.
In a note to investors, Jefferies analyst Brent Thill said he believes Azure growth will begin to reaccelerate in the second half of 2025.
“Our checks continue to indicate improving consumption/core cloud trends,” he wrote. “Also, [Microsoft] just announced that ‘OpenAI recently made a new, large Azure commitment that will continue to support all OpenAI products as well as training.’ ”
While Microsoft is one of the main beneficiaries of the AI boom, its stock price has lagged behind the competition. Shares of Microsoft were up just 5% over the last 12 months as of Monday, while Amazon (AMZN) and Google shares were up 44% and 26%, respectively.
Evercore ISI analyst Kirk Materne, however, says the stock could be set up for a “mini revenge trade” as AI sales increase, its Copilot adoption rate improves, and capital expenditure moderates, creating more free cash flow.
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