Azure Leads While AI Excitement Fuels Microsoft Stock

Key Points

• Azure revenue surged 39% YOY to over $75B, outpacing AI hype and proving cloud remains Microsoft’s core driver.
• The OpenAI alliance accelerated AI adoption, embedding Copilot and generative AI across Microsoft’s products.
• Microsoft balanced $80B in record investments with strong free cash flow, positioning the stock for lasting growth.

Microsoft Corporation NASDAQ: MSFT stock is up 20.55%, proving again that investors are willing to overlook valuation if they’re getting a return on that investment. Microsoft is trading at around 38x forward earnings at a slight premium to its historic average.

That hasn’t stopped investors from putting a floor on the stock. In fact, the consensus price target for MSFT stock is $612.54, which gives investors 20% upside from its closing price on Sept. 18.

Companies like Microsoft and several of its Magnificent Seven counterparts are building and financing the artificial intelligence (AI) economy. Specifically, Microsoft has committed approximately $80 billion in capital expenditures for its 2025 fiscal year. That’s the largest annual infrastructure investment in the company’s history.

More than half of that amount is targeted for AI-optimized data center expansions in the United States. The funds will support hyperscale facilities, custom silicon, edge clouds, sustainable energy, and advanced cooling technologies.

However, Microsoft also shows that it can continue financing its future growth while delivering shareholder value. The same can’t be said for other technology stocks under scrutiny in 2025. Investors were willing to reward technology stocks without expecting anything in return. But as AI has gone mainstream, investors want to see a return on that investment.

AI Growth Fueled by OpenAI, But Cloud Remains the Core

Microsoft’s AI ambitions have grabbed headlines, largely thanks to its deepening partnership with OpenAI. Since 2019, Microsoft has invested over $11 billion in OpenAI. This partnership gives Microsoft privileged access to OpenAI’s AI models and is critical to the company’s generative AI strategy.

Microsoft has exclusive access to large language models (LLMs) like ChatGPT. The company then takes ChatGPT’s cutting-edge capabilities and integrates them into products such as its Copilot in Microsoft 365, GitHub, and Azure services.

However, while AI has fueled investor enthusiasm, Microsoft’s cloud business remains the foundation of its growth. Azure’s annual revenue exceeded $75 billion in fiscal 2025, growing 39% year-over-year in the most recent quarter, significantly outpacing Microsoft’s overall AI-related revenue streams and the broader enterprise SaaS segment.

With nearly 25% global market share, analysts now see Azure as the top challenger to AWS and the most integrated platform for hybrid and multi-cloud deployments.

Azure’s growth is driven by surging demand for high-performance infrastructure from AI workloads, enterprise migrations, and Microsoft’s product ecosystem, as evidenced by quarterly cloud revenue rising to $46.7 billion.

Interplay Between AI and Cloud

AI and cloud are mutually reinforcing. Microsoft leverages OpenAI models to drive Copilot adoption, boost usage across Microsoft 365, and create differentiated cloud services, while Azure’s scale and reliability ensure Microsoft can satisfy both conventional enterprise needs and specialized generative AI tasks.

However, despite headlines about AI, Azure’s financial contribution remains much larger. The company’s cloud growth leads Microsoft’s overall results, even as Copilot and AI-powered features attract new enterprise customers and increase average seat value.

Why Microsoft Is a Stock to Own, Not Trade

A company with a market cap of over $3 trillion shouldn’t have a high dividend yield, and Microsoft doesn’t disappoint. But don’t let the 0.55% yield dismiss the value for shareholders.

Microsoft has paid the dividend for 23 consecutive years, pays $3.32 per share annually, and has a sustainable payout ratio of just over 24%.

The company also delivers shareholder equity with a substantial buyback program, including $3.2 billion in its most recent quarter.

However, it’s important to note that Microsoft does this while still generating strong free cash flow (FCF) and honoring the billions it plans to spend on data center growth in the coming years. 

The company's most recent earnings presentation reported, “Free cash flow was $25.6 billion, up 10% year-over-year, reflecting higher capital expenditures to support our cloud and AI offerings.”

This means that Microsoft is generating double-digit FCF while continuing to invest heavily in its future growth. That's an attractive setup for both growth and income investors.