Key Points
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I will be very interested in Azure performance and overall compute demand.
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I will also be interested in how changes in OpenAI and Microsoft’s agreement will impact the company moving forward.
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Copilot is another big aspect of the company that the market will be razor-focused on.
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It’s a big day in the tech world, with several companies in the “Magnificent Seven,” including Microsoft (NASDAQ: MSFT), set to report earnings results after the market closes today.
As most investors know, it’s been a difficult year for Microsoft, which closed out its worst quarter since 2008 in the first quarter, with shares down roughly 23%. Since then, as tensions in the Iran war have somewhat de-escalated, the stock has bounced back and is now down only about 10% this year.
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Wall Street analysts are expecting Microsoft to report earnings per share of $4.06 on revenue of nearly $81.4 billion in the company’s fiscal 2026 third quarter. Management previously guided for annual revenue growth of 37% to 38% in its Azure cloud division on a constant currency basis in the third quarter, suggesting a similar level to the previous quarter, when Azure experienced 38% growth.
The big questions I have heading into earnings are all about artificial intelligence, including how the broader sector looks through Microsoft’s lens and how AI initiatives are progressing at the company.
Azure, Copilot, and OpenAI
The most obvious first question I have is regarding growth in Microsoft’s Azure and other cloud services division, which has been incredibly strong in recent quarters and reflects how the company can benefit financially from AI.
Companies pay Microsoft to use its Azure cloud services for a variety of purposes, including data centers and AI services that help train and deploy AI models. This is great, but it also depends on the AI sector continuing its astounding growth.
For instance, last quarter, Microsoft disclosed that 45% of its Azure backlog is from OpenAI, the parent company of ChatGPT, which Microsoft has invested billions in.
Recent reports suggest OpenAI may be struggling to meet revenue targets. While I don’t think there will be any real impact on Microsoft’s upcoming earnings report, I will be curious to see if management offers any insights into overall compute demand.
Speaking of OpenAI, the company and Microsoft recently both announced that they have revised their partnership agreement.
Microsoft will remain the company’s primary cloud partner and will continue to receive revenue-share payments from OpenAI through 2030. However, OpenAI will now be able to serve customers on any cloud provider, while the agreement for Microsoft to license the intellectual property for its models and products will no longer be exclusive.
My second question is, how does this impact Azure revenue in the near term and longer term?
My third biggest question is about Microsoft’s digital AI assistant Copilot, a key part of the company’s AI strategy. On its lastearnings call Microsoft disclosed that it had grown paid Copilot seats to 15 million. However, the market seemed disappointed, as that was still only a small fraction of the company’s 450 million paid Microsoft 365 customers.
Last quarter, CEO Satya Nadella supposedly jumped in to improve the Copilot experience and launch new products and tools. I’m curious about Copilot’s growth and other comments detail Copilot’s traction.
Given the sell-off this year, I think Microsoft stock could see a nice move higher if it outperforms and gives the market a reason to be optimistic. While I never recommend trading on a short-term event like earnings, I do think long-term investors can own Microsoft.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.
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