Microsoft Earnings Likely Grew Last Quarter With Demand for Cloud Services

Investors will be focused on the profitability of its popular cloud-services business, Dan Morgan, senior portfolio manager at Microsoft-investor Synovus Trust Co., said in a note ahead of the earnings release.

Building the infrastructure to keep up with growing demand is costly, so some are questioning whether Microsoft’s cloud products can “continue to drive revenue growth ahead of an accelerating cost curve,” wrote Mr. Morgan. He pointed out that Microsoft said last year that it would be investing $20 billion over five years on advancing its security products.

Over the past two years, Microsoft has been one of the biggest beneficiaries of the shift to remote working that followed the spread of Covid-19. Companies, governments and schools world-wide turned to cloud-based technologies to facilitate their work, and Microsoft has been selling the tools used for the shift. While more organizations have been returning to doing work in offices, the Omicron variant of the virus might delay the return to normalcy.

The cloud business is one of the fastest-growing in tech and is expected to expand from $385 billion in 2021 to $809 billion by 2025, according to research firm International Data Corp. Microsoft is the second-largest player in the industry with nearly a 20% share of the world-wide cloud-computing market after

Amazon.com Inc.,

which dominates the sector with more than a 40% share, according to Gartner Inc.

Demand for personal computing machines, many of them using Microsoft’s Windows operating system, has surged and so has Microsoft’s videogame business. Strong demand for laptops and desktop PCs is expected to continue.

Microsoft has been making big moves to boost its videogame business. Its quarterly results could offer more clues on how its Xbox business is doing and what it plans to do next with this important source of revenues.

Last week, the company announced a $75 billion all-cash offer to acquire

Activision Blizzard Inc.

If it goes through, it will be Microsoft’s largest acquisition ever—close to three times as large as any deal it has ever done—and will position it as the third-largest videogame company in the world by sales. The planned investment also would bolster its subscription-game service, Game Pass, which hit 25 million subscribers recently.

“We believe that this is the clearest signaling by Microsoft to date of the company’s intention to take share and grow its Xbox and gaming business,” wrote Mark Moerdler, a Bernstein Research analyst, in a recent note for investors.

The company’s shares have done well since the start of the pandemic. They are up around 85% over the past two years, and their rise made Microsoft the most valuable company in the world for a short period last year. As part of the broader stock selloff, Microsoft shares have fallen more than 10% since the beginning of the year. They are down 5% since the Activision acquisition was announced last week.

Write to Aaron Tilley at aaron.tilley@wsj.com