Microsoft: Can it maintain a stable level of 3 trillion?

In the past two weeks, due to macro factors, Microsoft has experienced sideways fluctuations, but with the recovery of market risk appetite and continued optimism about the prospects of artificial intelligence, the technology sector as a whole has been boosted, and Microsoft has also taken advantage of the momentum to strengthen, smoothing out the pullback since the beginning of the year.

Although the east wind is good, it needs a strong bow in hand. Microsoft's continued upward momentum is largely due to its strong and eye-catching financial performance. In the third quarter of 2025, Microsoft handed in an outstanding report card that exceeded expectations: revenue of US$70.1 billion, a year-on-year increase of 13%; net profit reached US$25.8 billion, a year-on-year increase of 18%. The multi-point blossoming of business is an important reason why Microsoft is sought after by investors.

Cloud computing business is moving forward steadily

Microsoft's cloud computing business is centered on Azure and the surrounding ecosystem.

Azure is a public cloud platform launched by Microsoft and was commercially launched in 2010. It provides a complete set of solutions including infrastructure as a service (IaaS), platform as a service (PaaS) and software as a service (SaaS), and is aimed at both Tob and ToC markets.

The main difference between it and Amazon Cloud Computing is that Azure makes more use of Microsoft's existing enterprise customer relationship network and office ecosystem advantages. Enterprise customers who originally used Windows, Office 365 and Teams in large quantities achieved multi-terminal collaboration through Azure Active Directory and were guided into the Azure system without being aware of it. Account unification, data migration to the cloud, and more application ecosystem promotion are the three steps for Microsoft Cloud services to bind users.

Unlike Amazon Cloud, which is technology-oriented and builds a cloud system from the bottom up with developers as the core, Azure's user path emphasizes top-up, directly connecting users through SaaS services and AI platforms.

With the popularity of "hybrid office", "enterprise-level automation" and "SaaS services", Microsoft Cloud services are slowly penetrating users into more Windows users and enterprises. Due to the original operating system ecology and technical advantages, the convenience brought by cloud services can be said to be icing on the cake. Azure grew by 31% last quarter, exceeding the market consensus of 28%.

Microsoft also plays AI innovation

Among a number of technology giants, Microsoft is the first company to focus on AI and implement AI in productivity tools. Nvidia's core competitiveness lies in the underlying computing infrastructure, using high-performance GPUs to lead AI training and promote the market, while Microsoft's advantage is still based on user relationships. The two are at the application and foundation ends, forming a high degree of complementarity.

Microsoft has everything needed for AI, such as cloud computing, computing scheduling capabilities, and software ecology. After investing in OpenAI, it has mastered upstream large model resources. Microsoft vows to get a share of the AI ​​wave.

In 2023, Microsoft launched Copilot, taking the first step in the application of AI software. Microsoft chose to implement AI practical capabilities in products such as Word, Excel and Teams, which have a huge user base and stable use.

The results are obvious. As we mentioned, Microsoft's original office ecology is a conscientious cycle, with about 10% user growth each year. AI brings more convenience, and the number of daily active users of Copilot has almost doubled in the past year.

The success of AI in improving office efficiency will naturally extend to development tool chains such as Azure and GitHub, focusing on top-down ecological penetration. Currently, the two main tools, Microsoft 365 Copilot and GitHub Copilot, almost cover the entire application ecosystem of Microsoft.

In order to quickly occupy the market in the early days, Microsoft borrowed OpenAI's experience in large language models to help Copilot products land. But after the relationship with Open AI became tense, Microsoft gradually reduced its dependence on OpenAI's computing power and switched to self-built models, chips, and data layout to enhance computing cost control capabilities. Since then, Microsoft has successively launched Azure Maia 100 and Cobalt 100 chips, becoming more autonomous in large model training.

The core competitiveness of Microsoft AI lies in optimizing office efficiency issues to a certain extent. The document-based AI tools that we often see today are actually developed by Microsoft. After AI landed in the Microsoft family ecosystem, Microsoft's productivity and business process department revenue increased by 12% year-on-year. This is a rare case of Microsoft achieving sustained double-digit growth in a highly mature market. The main reason is that AI functions have created new user value and enhanced customer stickiness and willingness to pay. Unfortunately, due to the current diversified competition in AI and the limitations of the dissemination effect of office software, even Apple AI has surpassed Microsoft AI in the US stock giants.

Rebuilding the gaming business ecosystem

In 2022, Microsoft spent $69 billion to acquire Activision Blizzard, creating the largest acquisition in the global gaming industry. This news shocked the technology and gaming circles. At that time, most people believed that Activision Blizzard was in trouble, with an aging brand, exhausted creativity, and turbulent management of the company. It mainly relied on old products to sell feelings and reheat old dishes. At that time, Microsoft was in its prime. If the acquisition failed, Microsoft would need to pay Activision a breakup fee of $3 billion; and if the integration failed, the value of the $69 billion acquisition might be weakened at the same time. Faced with the lawsuit warning from the US FTC, Microsoft resolutely played the role of "sucker", which was considered by most people at the time to be a single-loss transaction.

As time goes by, when we re-examine this transaction, the result may be much more optimistic than we imagined back then. Let's see how Microsoft operates.

In the past, Microsoft's advantage has always been the perfect platform ecology, including the gaming field. But the shortcomings are also very obvious. Although it has the mainstream console platform Xbox, it still lacks strong content resources. User stickiness is not high, content is frequently iterated, and there is a lack of stable and valuable masterpieces.

Microsoft's idea is very clear: since the game matrix created by itself has never been able to break through the bottleneck, it will spend money to solve it.

Activision Blizzard's game IPs such as "Call of Duty", "Overwatch", and "Candy Crush Saga" have a global fan base and stickiness, and this advantage quickly produces synergy with Microsoft's game platform. After the acquisition was completed, Microsoft immediately connected them to its own Game Pass ecosystem. The effect was immediate, and the activeness and payment time of subscribers were significantly extended. At the same time, based on Activision Blizzard's original accumulation of mobile games, Microsoft has a complete game content matrix across consoles, PCs, and mobile for the first time, and has done better in cross-platform content collaboration.

In addition, this business milestone has a fundamental impact on the change of user behavior. In the gaming industry, the shift from a buyout system to subscription + micro-transactions has become a general trend, and Microsoft's strategic focus is to promote users to gradually get used to a consumption model centered on content streaming. The addition of Activision Blizzard has strengthened this trend: on the one hand, strong IP guarantees user stickiness and reduces subscription churn; on the other hand, long-term operating content is more conducive to Microsoft's collection of user preference data, thereby promoting the redevelopment of advertising, virtual items and differentiated services. Therefore, Microsoft has achieved the transformation of content assets to "games as a service" (GaaS).

Today, Xbox has achieved the strategic platform of Game Pass subscription + cloud gaming from traditional console business, and has become increasingly mature. In the latest financial report, Xbox content and service revenue soared by 61%, and the content plus platform-dominated revenue structure is becoming healthier. This also gradually dilutes Microsoft's dependence on the hardware cycle. In the past few years, Microsoft's hardware sales structure has been slightly weak, but in the path of "cloudification" of game distribution, Microsoft did not choose to compete with other manufacturers for hardware capabilities at this time. It chose another way: locking users' time and money through software ecology and IP. This is similar to Apple's growth model of shifting from competing with other manufacturers on parameters to service-bound revenue.

This quarter, Microsoft's gaming division's total revenue increased by 4.9% year-on-year, of which the growth mainly came from Game Pass and popular games-based content and service systems, while hardware revenue substantially decreased by 6%, indicating that consumers have cut back on major consumer spending. Recognizing that the growth of the console business is not as good as before, Microsoft is gradually turning to the "Xbox Everywhere" strategy, emphasizing cloud gaming, platform ecology and game content. Currently, the usage time of Xbox cloud games has exceeded 150 million hours, and the transformation strategy has been effective.

On May 22, the US Federal Trade Commission (FTC), which had suffered a series of defeats, wisely withdrew its complaint against Microsoft's acquisition of Activision Blizzard, and this two-year game regulatory offensive and defensive battle came to an end for the time being. From a business perspective, Microsoft's decisive bet has revitalized the game branch, which was not originally a brilliant puzzle.

Full of confidence

Microsoft's current EPS is $3.46, which has fully exceeded market expectations. The main reason for the increase in revenue was the surge in Azure cloud service revenue, of which AI-related services contributed 12 percentage points, which means that Microsoft has formed a closed-loop ecosystem in the implementation of enterprise-level AI and can monetize efficiently.

While sales and earnings in the third quarter exceeded expectations, the market also remained optimistic about its prospects for the fourth fiscal quarter. Management expects sales this quarter to be between US$73.15 billion and US$74.25 billion, an increase of about 14% year-on-year within the median range of the expected range. Before the release of the financial report, analysts on average expected sales in the fourth fiscal quarter to reach US$72.26 billion.

In terms of capital allocation, Microsoft returned a total of US$9.7 billion to shareholders during the quarter, continuing the rare dual strategy of dividends and repurchases for technology stocks. Microsoft's current P/E ratio is about 34 times, which is relatively not exaggerated compared with its growth pace and high profit quality.

It is worth mentioning that after participating in the annual Microsoft 360™ event, the well-known investment institution Avic Investment Bank, based on in-depth exchanges with Microsoft executives, customers and partners, believes that Microsoft's AI strategy, cloud computing growth and financial situation are very strong, so it has once again raised its target price. Other analysis agencies such as Citi, JPMorgan Chase, and UBS also maintain buy, overweight or outperform ratings, with target prices concentrated between US$490 and US$540.

CEO Satya Nadella has repeatedly stated that he believes that artificial intelligence is the next major computing platform, and it is right and necessary to lead this transformation, otherwise it will fall behind like in the mobile field.

Betting on the future

At the beginning of the year, Microsoft announced that it would increase its full-year capital expenditure to US$80 billion, mainly for the expansion of global AI data center infrastructure. Microsoft is confident in the potential momentum of its future business, especially under the premise of the current explosive growth in AI demand.

With Apple and Nvidia pressing step by step, Microsoft cannot describe itself as stable enough, and it needs to perform equally well in subsequent consecutive financial reports. Nvidia is about to catch up, with a gap of $300 billion with Apple, but considering the current rising pace of US stocks, this gap is not as big as imagined, and it can be said that it is only one step away.

Therefore, Microsoft still has to bet on AI in the future. If the performance in AI is better, the stock price may be able to break through further. At present, in the competition of AI, it has to cross the mountain of Amazon. Amazon's business and Microsoft's business are tending to be highly overlapped. I believe that there will be more confrontations between the two sides in the future.