Microsoft saw surprisingly strong performance in the cloud, but it's also monetizing generative AI well and moderating capital-spending growth.

Against a lowered bar, Microsoft Corp. delivered big with its latest quarterly results, and that translated to the stock's best post-earnings performance in about a decade.

Microsoft's $(MSFT)$ third-quarter report contained "every element needed to dissipate various concerns," according to Bernstein analyst Mark Moerdler.

Perhaps the most visible positive was Microsoft's Azure cloud-computing growth, which at 35% in constant currency, easily exceeded expectations and marked an acceleration from 31% in the prior quarter. Microsoft's Azure guidance impressed as well.

But there were other upbeat signs as well. "While Azure AI continues to be an increasing percentage of Azure revenue," contributing 16 percentage points to growth in the March quarter, "non-AI Azure growth stabilized due to acceleration in cloud migrations," Moerdler noted.

Meanwhile, Microsoft saw moderating growth in capital expenditures and management indicated revenue traction for Copilot, the company's generative artificial-intelligence assistant for products like Microsoft 365 and GitHub.

Executives flagged that deal sizes are growing for Copilot and more customers are choosing to make the capabilities available to additional employees.

"We like the setup for the stock," Moerdler wrote. "Microsoft previously proved they can drive a valuable cloud business, and now they are showing that they can drive both the cloud and the largest AI business, via a combination of high quality gen AI inferencing and gen AI apps."

Microsoft's stock shot up 7.6% on Thursday. That amounted to its best post-earnings performance since it rose 10.1% following its report for the September quarter of 2015, according to Dow Jones Market Data.

Melius Research analyst Ben Reitzes also emphasized the degree to which Microsoft delivered a positive surprise. "Going into this print, nobody was talking about Azure accelerating to 35% constant-currency growth (from 31%) and guiding the next quarter for 34-35%," he wrote. "Not to mention, nobody thought they'd say they will be capacity constrained in the June quarter - given reports around mythical cuts."

He flagged that while currency fluctuations were once an issue for Microsoft's growth, now they could be a benefit as the dollar has weakened. But when factoring out currency swings, Microsoft is still growing overall revenue at a mid-teens rate and "that is really sensational vs. other software giants."

"Even with tariff uncertainty, there is so much recurring revenue, and now, with cloud acceleration, [Microsoft] really warrants a premium vs. challenged [software-as-a-service] players," Reitzes wrote.

Evercore ISI's Kirk Materne agreed that Microsoft's results "should help flip sentiment in a more positive direction" after shares spent the past few quarters "twisting in the wind."

"Clearly, the macro environment remains a wild card, but with Azure back in 'beat/raise' mode, we believe that overhang now turns into a tailwind and highlights not only the significant demand for AI services on Azure, but also [Microsoft's] broad base of infrastructure offerings to support the ongoing migration of enterprise workloads to the cloud," Materne continued.

He noted that the non-AI portion of Azure seems stable, surprising many on Wall Street who may have expected the economic landscape to cause some pressure there.