We reiterate our 1 rating on Microsoft despite its softer guidance — here's why

Microsoft reported better-than-expected quarterly results Thursday, led by strong growth in its cloud-computing business — but soft guidance pressured shares in after-hours trading. Revenue increased 16% year over year to $65.56 billion in its fiscal 2025 first quarter, beating the Street consensus estimate of $64.51 billion, according to data from LSEG. Earnings per share increased 10% from last year to $3.30, ahead of EPS estimates of $3.10, LSEG data showed. Microsoft Why we own it : Microsoft is a core backbone of global productivity thanks to its Office 365 suite and hybrid cloud platform Azure. The company is also proving itself to be a key provider of artificial intelligence tools due, in part, to its large investment in OpenAI, the startup behind ChatGPT. We also like what it's doing in the video gaming industry as looks to grow recurring revenue streams. Competitors : Amazon , Alphabet and Salesforce Weight in portfolio : 2.75% Most recent buy : Aug. 5, 2024 Initiated : Dec. 4, 2017 Bottom line Overall it was a great quarter with revenue growth beating estimates in all three business segments, including a slight upside in Azure growth. Operating margins were a positive as well, though they were down year over year due to the company's aggressive, but justified, spending on AI infrastructure. Some business highlights from the quarter include: Microsoft's AI business is expected to exceed an annual revenue run rate of $10 billion next quarter. Demand for AI services was a strong tailwind to Azure, contributing 12 percentage points of growth. That's up from 8 points in the prior quarter. The company claimed its cloud will be the first to use Nvidia's Blackwell system to power its AI servers. Microsoft improved the response quality and speed of 365 Copilot by nearly 3x times. Usage accelerated and the number of people using the product daily more than doubled quarter over quarter. Nearly 70% of the Fortune 500 is using Microsoft 365 Copilot and the company is seeing faster customer adoption than any other new Microsoft 365 Suite. Despite these positive trends and innovations, revenue guidance for next quarter fell a touch short of expectations. That's a no-no in this market that needs beats and raises to send stocks higher, especially for a stock where there is still some investor frustration on whether these big AI bets will pay off. Although AI competition is heating up, Microsoft should still be viewed as a leader and we make no real changes to our longstanding thesis. We reiterate our 1 rating and $500 price target. Quarterly results The numbers look different this quarter due the company re-segmenting a few businesses , but overall there's not much to complain about. Productivity and Business Processes topped estimates on both sales and operating income. But gross margin percentage decreased slightly due to the scaling of AI infrastructure. Microsoft 365 Commercial cloud revenue growth increased 16% year over year with seat growth up 8%. Microsoft 365 Consumer cloud revenue growth increased 7% year over year with subscribers increasing to 84.4 million from 82.4 million one quarter ago. LinkedIn revenue grew 9% with strength seen in all lines of business. Dynamics 365 revenue increased 19%year over year driven by growth across all workloads. Intelligent Cloud posted a solid upside surprise in revenue, but the gross margin percentage fell due to the scaling of its AI infrastructure. Azure was a slightly positive story this quarter. Revenue growth ticked down sequentially to 33% annual growth, or 34% on a constant currency basis. This beat FactSet's consensus of 28.6% but there may be a caveat to the consensus due to the company's re-segmentation. Microsoft shifted its mobility and security, and Power BI data analytics sales figures, out of Azure and other cloud services and into to its Productivity & Business Processes segment to give investors a better picture of how Azure is performing. This change may not have been fully reflected on FactSet. A more accurate comparison may be the CNBC consensus of 32.8%, which still means it was slight beat versus the 33% reported figure. The More Personal Computing posted stronger sales but missed on operating profit. The Activision acquisition was main driver of revenue growth. Gross margin percentage was basically unchanged. Windows OEM and devices revenue increased by 2% as Windows OEM grew and Devices declined. Search and News Advertising — excluding traffic acquisition costs — was up 19% in constant currency as volumes and higher revenue per search improved. Gaming increased 43% year over year with Xbox content and services revenue growing 61%. Xbox hardware revenue declined. Guidance Management's revenue outlook for its fiscal 2025 second quarter was not enough to satisfy the Street. The midpoint was about $1.3 billion below analysts' consensus with a miss on Intelligent Cloud. Azure revenue growth is expected to be 31%, or 32% on a constant currency basis, reflecting a small deceleration from the first quarter on flat contribution from AI services. This may be disappointing, but management explained that some of the deceleration was due to capacity shifted out of the second quarter. Microsoft is navigating through a capacity constrained business, meaning there is more demand than what they can book. With available capacity expected to increase in the quarters ahead, management is sticking by its guidance that Azure will reaccelerate in the second half of the fiscal year. One other tidbit of guidance is that capital expenditures are expected to increase on a sequential basis based on cloud and AI demand signals. The company will make adjustments as needed based on the demand it sees. (Jim Cramer's Charitable Trust is long MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Microsoft reported better-than-expected quarterly results Thursday, led by strong growth in its cloud-computing business — but soft guidance pressured shares in after-hours trading.