Productivity Suite, Cloud and AI to Continue Growing, Pushing Up Net Margins

• Updated my forward and present values to $511 and $350 per share respectively.
• MSFT is performing roughly within my expectations, and the stock is slowly growing into its premium.
• MSFT will use Azure to sell AI infrastructure to government and existing large customers.
• The company is well positioned to enable large customers to use their proprietary data to incorporate AI, giving it an advantage over general AI apps.

Microsoft posted a 16% revenue growth for the first quarter in their 2025 fiscal year. The largest driver was the cloud, growing 20% to $24.1B, and now amounts to 37% or the total revenues. For the last 12-months, the total revenue growth rate also comes up to 16%, resulting in revenues of $254.2B.

In order to reach my 2028 estimate of $367B, Microsoft needs to grow by around 10% in the remaining years. The company is performing slightly better than my estimated 11.6% CAGR. However, the last 4 sequential quarters show little improvement, and this is reflected in the stock price, which has remained largely flat after the January rally.

The company estimates that Q2 revenues will reach up to $69.1B, implying up to 11.5% YoY growth. It seems that Microsoft is supply-constrained, and may not be able to meet data center demand because of delays from outside suppliers. Azure grew 34%, and is forecasted to jump another 32% in Q1.

Net income increased 10% to $24.7B, while operating income was slightly down by 1%. In the last 12 months, net income was $90.5B, amounting to a margin of 35.6%. Microsoft’s profit margin is on track to reach my 38% estimate in 2028, and the company may boost profitability once the majority of AI investments stabilize.

Microsoft Is Well Positioned To Lead In Enterprise AI

Microsoft has invested heavily into its infrastructure. In their recent FY quarter, they invested close to $15B in PPE capex. The company is also continuously spending more than $1.3B in the last 3 quarters for business acquisition expenses, with Q2 FY’23 being the exception where they spent $65B on the OpenAI acquisition.

The payoff from these AI investments can currently be found in the growth of Microsoft’s Azure, which is the cloud platform where customers are building their own AI systems. Given that we are still in the build-up phase, it may take some time before AI applications start yielding mass adoption and there is some degree of uncertainty on who will emerge as the winner. In my view, Microsoft will be able to port any innovative application as a decentralized business solution. This means that companies will want to keep their business data proprietary, and can use Azure to build AI-powered software that meets their use case. Given the specific nature of Azure and the relationships that Microsoft maintains, I suspect that most of the high paying customers will be government agencies and large enterprise clients that already have some software deployed on azure. 

Additionally, Microsoft will likely be able to offer instances of Office-backed AI services that are powered by customers’ own data.

Valuation Update

For this reason, I suspect that Microsoft will emerge as an AI winner regardless of what kind of “killer-app” ends up being the most productive AI use case.

The underlying assumptions here are that simpler software will not be able to solve the problems that can be tackled with AI, and that AI becomes stable enough to drive business growth.

In general, I view that Microsoft is performing roughly in-line with my estimates, and I will be extending my forecast horizon to 2029. 

In my updated estimates, I will use a 9% growth rate from 2028 to 2029, yielding revenues of $400B. I will maintain my profitability assumption at 38%, and converge my future PE to 24x.

This yields a net income of $152B, and a forward value of $3.65T or $511 per share.

Retaining my 8% discount rate of 8%, I get a present value around $2.48T or $350 per share. 

In my view, the market is pricing Microsoft around a 3-year premium, which has come down since the summer rally. I believe that the company is well-positioned to keep up performance and grow into its premium. Given that we are still operating in an innovative field, the market may maintain some level of premium going forward as a way to hold optionality value in case we experience more opportunities in AI.