Microsoft earnings set to test AI narrative amid margin pressure

​​​Eight-quarter winning streak faces fresh test

​Microsoft's remarkable run of eight consecutive earnings beats has set expectations high for its quarter four (Q4) fiscal 2025 results due on 30 July. The consensus forecast of $3.37 adjusted earnings per share (EPS) represents steady growth, though the bar continues to rise.

​Revenue expectations of $73.89 billion, up 11% year-on-year (YoY) at constant currency, demonstrate the market's faith in Microsoft's diversified business model. However, this growth rate masks some concerning trends beneath the surface.

​The company's ability to consistently exceed estimates has become almost routine, but this quarter presents unique challenges. Artificial intelligence (AI) infrastructure investments are beginning to weigh on margins while competitive pressures intensify across key segments.

​AI monetisation shows promise but adoption lags

​The AI narrative remains central to Microsoft's investment case, with potential AI productivity gains in the fiscal commentary. However, the reality of AI adoption appears more nuanced than initial expectations suggested.

​Only around 4% of enterprise customers have deployed Copilot AI across all seats, though even limited rollout is generating an estimated 6% average revenue per user uplift. This suggests strong pricing power when customers do adopt the technology.

​The concerning element lies in Microsoft 365 Commercial growth rate deceleration, indicating adoption friction that could limit near-term AI revenue expansion. This divergence between potential and reality will likely feature prominently in management commentary.

​Azure growth story faces margin headwinds

​Azure remains Microsoft's crown jewel, with AI-related revenues potentially reaching $4-4.5 billion in Q4, accounting for 15-16 percentage points of Azure growth. This represents substantial momentum in the cloud infrastructure battle against Amazon and Google.

​KeyBanc's value-added reseller checks show high single-digit sequential growth across cloud segments, suggesting improving partner execution. UBS has raised its price target to $600.00, citing potential Azure upside and workforce optimisation tailwinds.

​However, the investment required to maintain this growth trajectory presents challenges. Microsoft's ongoing AI infrastructure spending is expected to weigh on fiscal 2026 operating margins by 100-150 basis points, with $100 billion in capex flagged for the year.

​This creates a classic investment dilemma: short-term margin pressure versus long-term competitive positioning. The market's reaction will depend heavily on management's ability to articulate the return on this massive investment.

​Microsoft stock price – technical analysis

​Microsoft’s stock had been steadily declining well before the general market weakness in March and April. Its record high in July 2024 was the followed up by an anaemic rebound into mid-December, when the shares then declined for four months.

​Support was finally found at $340.00, and since then the shares have been on an impressive run. They smashed through the December highs in May, and then took out the July 2024 record high in early June, but have continued to gain since then.

​Momentum as measured by stochastics has been declining since early June, though the price itself continues to rise. In the event of a pullback the stock may find support at $470.00, the July 2024 record high.

Microsoft chart

​Valuation premium demands perfection

​Microsoft's forward price-to-earnings (P/E) ratio of 35.3x reflects significant growth expectations embedded in the current $512.50 share price. While the consensus target of $554.08 suggests further upside, this valuation leaves little room for disappointment.

​The analyst community remains overwhelmingly bullish with 65 buy ratings, 6 holds, and just 1 sell recommendation. This consensus creates potential for surprise moves if results or guidance diverge from expectations.

​Additional risks include the ongoing cybersecurity investigation related to Chinese state actors, which could impact cloud security confidence. While contained, such issues highlight the reputational risks facing large technology platforms.