Will Microsoft's AI Services Help Maintain Its Cloud Growth Momentum?

Microsoft MSFT has been expanding its Azure platform and AI services to support the growing demand for intelligent tools and automation. The company continues to integrate AI into its offerings. These offerings are built on Azure infrastructure and help organizations create and deploy their own AI agents. In the third quarter of fiscal 2025, over 10,000 organizations had used Agent Service, and more than 1 million custom agents were created across Microsoft platforms, up 130% quarter over quarter. Microsoft also processed more than 100 trillion tokens in the quarter, up 5 times year over year.

Recently, Microsoft introduced the MU language model, which now powers the new AI agent in Windows 11 Settings. The agent allows users to interact with system settings using natural language. The technology, which is powered by Azure AI, shows how Microsoft is using its AI services to power real-world features across its ecosystem.

The launch of the MU model and its integration into Windows is expected to increase usage of Azure’s AI tools and services. As more users and organizations adopt these agent-based features, Azure cloud consumption is likely to rise. This supports Microsoft’s ongoing focus on bringing AI into mainstream productivity and enterprise workflows.

In the third quarter of fiscal 2025, Microsoft’s Intelligent Cloud segment generated $26.8 billion in revenues, up 21% year over year. It accounted for 37.9% of MSFT’s total revenues. Azure and other cloud services grew 33%, with AI services contributing 16 percentage points to that growth. Our model estimate for the Intelligent Cloud segment’s revenues in fiscal 2025 is pegged at $105.3 billion, indicating 20.4% growth year over year.

MSFT Faces Stiff Competition in the Agentic AI Space

Microsoft is facing tough competition from Amazon AMZN and Alphabet GOOGL, ramping up agentic AI efforts.

Amazon’s AWS is making it easier to build agentic AI with tools like Agents for Bedrock, AWS App Studio and Amazon Q that help developers create AI agents that work across apps and data. With built-in support for orchestration and reasoning, Amazon’s AWS is becoming a strong platform for next-gen AI tools.

Alphabet’s Google Cloud is pushing into agentic AI with tools like Agent Builder. With built-in orchestration and support for Gemini models, Alphabet is making agent development faster and more accessible for real-world use.

MSFT’s Share Price Performance, Valuation and Estimates

MSFT shares have gained 17.7% in the year-to-date (YTD) period, outperforming the Zacks Computer – Software industry and the Zacks Computer and Technology sector’s growth of 13.5% and 4.5%, respectively.

MSFT’s YTD Price Performance

From a valuation standpoint, MSFT stock is currently trading at a forward 12-month Price/Sales ratio of 11.70X compared with the industry’s 9.59X. MSFT has a Value Score of D.

MSFT Valuation

The Zacks Consensus Estimate for fourth-quarter fiscal 2025 earnings is pegged at $3.35 per share, which has remained steady over the past 30 days, indicating 13.56% year-over-year growth.

Microsoft Corporation Price and Consensus

Microsoft Corporation price-consensus-chart | Microsoft Corporation Quote

The consensus mark for fiscal 2025 earnings is pegged at $13.36 per share, which has remained steady over the past 30 days. The estimate indicates 13.22% year-over-year growth.

Microsoft currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. 

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This article originally published on Zacks Investment Research (zacks.com).

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