Is "Magnificent Seven" Laggard Microsoft Ready to Rally?

Geoffrey Seiler, The Motley Fool

Sun, May 4, 2025, 8:41 AM 5 min read

• Microsoft turned in a strong quarter and issued upbeat guidance.

• Its Azure cloud computing unit once again led the way with revenue growth of 33%.

• Azure and AI should continue to help drive growth for the company moving forward.

Only one "Magnificent Seven" stock lagged the performance of the S&P 500 (SNPINDEX: ^GSPC) last year, and that was Microsoft (NASDAQ: MSFT). However, after reporting strong fiscal Q3 results and issuing upbeat guidance, the software giant is well on its way to having a better 2025.

Let's take a look at the company's most recent report and guidance to see if the stock can continue to rally and shed its laggard status in 2025.

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While best known for its suite of software productivity tools, such as Excel and Word, as well as its Windows personal computer (PC) operating system, it is the company's cloud computing unit Azure that has become its biggest growth driver in recent years. This continued to be the case last quarter.

For fiscal Q3, Azure revenue climbed 33%, or 35% in constant currencies. It marked the seventh straight quarter of 30% or more revenue growth at Azure and was above its earlier forecast for growth of between 31% to 32% in constant currencies. The company credited capacity coming online quicker than expected, while noting that it saw outperformance in its non-AI (artificial intelligence) business. AI services, meanwhile, accounted for nearly half of Azure's overall growth.

Overall "intelligent cloud" revenue, where Azure sits, climbed 21% year over year to $26.8 billion. GitHub also continues to be a strong contributor to this segment, with GitHub Copilot users quadrupling year over year to more than 15 million users.

Looking ahead, the company forecast Azure revenue to grow by 34% to 35% in constant currencies in fiscal Q4, driven by strong demand for its portfolio of services. It noted that demand is currently growing a bit faster than expected, which will lead to some capacity constraints after June.

Microsoft plans for its fiscal 2026 capital expenditure (capex) budget to be higher than fiscal 2025, but to grow at a slower rate. It plans to invest in a greater mix of short-lived assets, which it said will better directly correlate to revenue than long-lived assets. This essentially means that it plans to invest more in things like servers and graphic processing units (GPUs) next fiscal year, as opposed to real estate and data center buildings.