Microsoft’s MSFT third-quarter results topped the high end of the firm’s guidance. Revenue increased 13% year over year to $70.1 billion, compared with the high end of guidance of $68.7 billion while operating margin was 45.7%, compared with the high end of guidance at 44.6%.
Why it matters: Results are good across the board, with upside to our estimates on top and bottom lines. Revenue for all segments was above the high end of guidance. Critically, we see very impressive performance within Azure, in traditional and artificial intelligence workloads.
In our view, near-term demand indicators are robust. Commercial bookings grew a solid 17% year over year in constant currency based on surging Azure commitments from OpenAI and other large deals. Remaining performance obligations increased 34% year over year to $315 billion.Demand for Azure AI services is surging, which is a long-term positive. While Azure remains capacity-constrained, AI performed better than internal expectations, while traditional workloads rebounded. Azure growth was 35% in constant currency for the quarter and topped guidance.
The bottom line: We raise our fair value estimate for wide-moat Microsoft to $505 per share, from $490 previously based on good results and guidance, while our long-term estimates remain unchanged. We view shares as attractive and the stock remains one of our top picks.
Coming up: Overall guidance is impressive in this environment. Microsoft provided better-than-expected guidance on the top and bottom lines, including $73.7 billion in revenue, 43.4% operating margin, and $3.34 in earnings per share at the midpoints.
The firm notes no change in customer behavior based on tariffs or DOGE.
Big picture: We see results reinforcing our long-term thesis, which centers on the expansion of hybrid cloud environments, the proliferation of artificial intelligence, and Azure. We center our growth estimates around Azure, Microsoft 365 E5 migration, and traction with the Power Platform.
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