Microsoft’s AI Bet Faces a Major Test This Earnings Season

Key Points

• Microsoft stock is climbing ahead of earnings as investors focus on Azure growth and AI monetization.
• Despite concerns about valuation, analysts remain bullish with multiple price targets above $600.
• Key risks include slowing Azure growth and a shifting partnership dynamic with OpenAI.

Earnings season is underway, so it’s time for investors to focus on some of the top technology stocks. One of the most closely watched names will be Microsoft Corporation NASDAQ: MSFT. The tech giant has delivered a total return of over 16% in the last year and a gain of over 155% in the last five years.

The company’s depth and breadth touch the most promising themes in the tech sector: artificial intelligence (AI), cloud computing, productivity software, and cybersecurity. The company has a market cap of $3.76 trillion, which means that investors who own passive index funds like the SPDR S&P 500 ETF Trust NYSEARCA: SPY or the Invesco QQQ NASDAQ: QQQ have heavy exposure to MSFT stock.

Microsoft stock is up just over 20% in 2025. That’s in line with NVIDIA Corp. NASDAQ: NVDA and Meta Platforms Inc. NASDAQ: META, which also garner significant interest from institutional investors.

However, at 39x earnings, investors have to wonder if even a quality stock like Microsoft is simply too expensive. The stock is trading at a valuation that’s higher than its historical averages. That debate carries over to the technical outlook as the relative strength indicator (RSI) points to Microsoft being overbought at its current level.

History Says Keep an Eye on Azure

MSFT stock has a pattern of climbing ahead of earnings. However, if 2025 is any indication, what happens to the stock after earnings will come down to what the company says about its cloud computing business, Azure.

Concerns over Azure’s growth sent the stock on a multi-month decline of nearly 14% in January 2025. However, the bottom of that move coincided with the run-up ahead of its April 2025 earnings. A much brighter outlook for Azure has fueled a gain of over 37% in the last three months.

That means investors will want to pay close attention to what Microsoft says about Azure on July 30. Currently, analysts estimate common currency growth in the cloud business of around 20% to 22%.

But is there more for investors to consider?

Margins Will Remain Strong

Microsoft has committed significant capital expenditures to the AI data center buildout. However, the company is taking steps to maintain operational efficiency, including with a series of job cuts. That should be enough to protect the company’s margins.

That's reflected in the company’s internal estimates. Microsoft anticipates 19%-20% constant currency growth in costs of goods sold (COGS) as opposed to 5% constant currency growth in operating expenses.

What Will the Company Report on OpenAI?

In addition to cloud computing, Microsoft has delivered strong revenue and earnings due to its partnership with OpenAI. The relationship between the two companies has become rocky as both sides test the limits of their partnership.

Heading into earnings, investors will look for more details on how OpenAI’s decision to add Google Cloud as a compute partner will impact the company. Microsoft Azure receives 49% of OpenAI’s profits (that’s valued at approximately $130 billion as of this writing). However, that number, which represented a significant moat for Microsoft, is looking a lot smaller as OpenAI begins to branch out.

Analysts Are Bullish on MSFT Stock

Microsoft stock closed at $505.67 on July 22.

That was about 7.5% below the consensus price target of $544.07.

However, the Microsoft analyst forecasts on MarketBeat show that seven analysts have raised their price targets on MSFT stock so far in July.

The latest came from Citigroup Inc. NYSE: C on July 21.

The bank was already bullish on the stock with a prior target of $605, more than 20% higher than its current price. However, Citi raised that target to $613.

Citi isn’t the only analyst firm with a $600 price target.

At least three other firms, Piper Sandler, Oppenheimer, and DA Davidson, also have $600 price targets for MSFT stock.