Microsoft (MSFT) Stock: Should You Buy After Another Earnings Beat?

TLDR

• Microsoft reported Q3 revenue of $77.7 billion and earnings per share of $3.72, both beating analyst estimates by healthy margins.
• The stock dropped over 2% in after-hours trading despite strong results, driven by concerns about elevated AI infrastructure spending reaching $34.9 billion.
• Capital expenditures on AI jumped 74% from the forecasted $20.5 billion, with the company warning spending will stay high through 2026.
• Free cash flow rose 33% year-over-year to $25.7 billion, helping offset the impact of increased infrastructure investments.
• OpenAI signed a new agreement for $250 billion in Azure services, with Microsoft extending key revenue and IP exclusivities through 2030-2032.

Microsoft delivered another quarter of strong financial performance, but investors weren’t entirely convinced. The stock slipped just over 2% in after-hours trading on October 30, 2025, despite crushing earnings expectations.

The results themselves were impressive by any measure. Revenue hit $77.7 billion, beating the Street’s estimate of $75.6 billion. That represented 18% growth compared to the same period last year.

Earnings per share came in at $3.72, topping the expected $3.68. That marked a 12% increase year-over-year. Microsoft Cloud revenue reached $49.1 billion, up 28% from the previous year.

Microsoft Corporation, MSFT

The company’s gross margin expanded 18%. Free cash flow surged 33% to $25.7 billion. On paper, these numbers should have sent the stock higher.

So what spooked investors? The answer lies in Microsoft’s AI infrastructure spending. The company reported capital expenditures of $34.9 billion on AI infrastructure. That’s a 74% jump from the previously forecasted $20.5 billion.

AI Infrastructure Costs Mount

Microsoft made it clear that these elevated spending levels aren’t going away anytime soon. The company expects capital expenditures to remain high into 2026. The reason is straightforward: demand for AI computing power is growing faster than Microsoft can build out the necessary infrastructure.

The company needs more GPUs, networking chips, and power capacity for its data centers. Microsoft plans to increase total AI capacity by 80% in 2025. The data center footprint is expected to double within two years.

This spending spree creates a short-term problem for Azure. The cloud platform might not be able to onboard new customers or expand existing workloads as quickly as investors hoped. Azure has been a primary driver of Microsoft’s growth for the past two years.

The market’s reaction makes sense when you consider the stock’s valuation. Microsoft trades at a forward price-to-earnings ratio of 41x. That’s expensive, even for a tech giant. Investors have been paying a premium based on expectations of continued strong growth.

When a company warns that returns on investments might take longer than expected, even stellar quarterly results can trigger selling. Microsoft was essentially priced for perfection heading into earnings. It delivered near-perfection, but the caveat about spending gave traders an excuse to take profits.

OpenAI Partnership Expands

One bright spot that may have gotten lost in the shuffle was Microsoft’s expanded partnership with OpenAI. The AI company signed a new agreement for $250 billion in Azure services. That’s not a typo.

Microsoft also extended key revenue and intellectual property exclusivities through 2030-2032. This deal provides visibility into future Azure revenue and cements Microsoft’s position as OpenAI’s primary infrastructure provider.

Analysts haven’t abandoned ship. Four analysts issued new price targets following the earnings report. The lowest came in at $625, with the highest at $650. The consensus target sits around $631, implying an 18% upside from current levels.

Ten analysts revised their earnings estimates higher in the last 60 days. The consensus estimate for fiscal 2026 increased by $0.18 to $15.53 per share. Microsoft boasts an average earnings surprise of 8.5%.

The company holds a Zacks Rank of 3 (Hold) with a Growth Style Score of B. Earnings are projected to grow 13.9% year-over-year for the current fiscal year. Sales growth is expected to hit 14%.

Microsoft’s cash flow growth reached 19%, with analysts projecting 23.1% expansion in 2026. The stock recovered from its after-hours decline, with analysts describing the post-earnings move as a “pause” rather than a “reversal.” After two gap-ups in the previous month, some traders had been calling the stock’s move a “blow off top.”

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