Microsoft (MSFT -0.36%) recently impressed investors with quarterly numbers that easily beat analysts' expectations. The bulls rushed back to the stock, and it's risen nearly 30% this year against the S&P 500's 8% gain.

The bulls believe Microsoft's expansion of its cloud business will continue to drive its growth and widen its moat. The bears claim it isn't immune to the macro headwinds, and that it still faces a lot of pressure from antitrust regulators.

Two recent developments that can be considered a green flag and a red flag for Microsoft might support the bullish and bearish cases, respectively. Let's review them both to see if they'll tilt the scales in favor of the bulls or the bears.

Microsoft CEO Satya Nadella.

Image source: Getty Images.

Green flag: Azure is still growing faster than AWS

The most closely watched component of Microsoft's cloud business is Azure, the world's second-largest cloud infrastructure platform after Amazon Web Services (AWS). Azure controlled 23% of the market in the fourth quarter of 2022, according to Canalys, up from 22% in the year-ago period. AWS' share dipped from 33% to 32% during the same period, while Alphabet's Google Cloud grew its share by 1 percentage point to 10%.

Those estimates suggest that Microsoft and Google are both pulling customers away from AWS. Azure's growth rates over the past year support that thesis. Azure's revenue rose 27% year over year in the first quarter of fiscal 2023 (which ended March 31) compared to its 40% growth in Q4 and 46% in Q3.

Azure's growth cooled off as the macro headwinds forced companies to rein in their software spending, but it's been expanding at a much faster pace than AWS. AWS only increased its revenue 16% year over year in Amazon's latest quarter (Q1 2023), compared to the segment's 20% growth in Q4 of 2022 and 27% in Q3.

During Microsoft's latest conference call, CEO Satya Nadella said Azure "took share" from its competitors in the first quarter even as it faced persistent macro challenges. But during Amazon's latest call, CFO Brian Olsavsky warned that AWS' slowdown would persist this year as companies continue to "optimize their cloud spending" in a tough market.

Azure's stronger growth and market share gains could make it a more compelling play on the cloud market than Amazon, which is still juggling the growth of AWS with the challenging expansion of its lower-margin retail business.

Red flag: A potentially fatal blow to the Activision Blizzard deal

Last year, Microsoft agreed to buy video game maker Activision Blizzard (ATVI) -- which had been struggling with sexual harassment accusations, employee walkouts, and delays of its top games -- for $68.7 billion.

That was a costly but shrewd move since adding the maker of Call of Duty, World of Warcraft, Overwatch, and Diablo to its gaming portfolio would expand Microsoft's lineup of exclusive games and add more content to Xbox's Game Pass service. It would also complement its previous acquisitions of ZeniMax Media (Bethesda, id Software, and Arkane) and the Minecraft maker Mojang, as well as widen its moat against Sony and Nintendo's first-party games.

Microsoft initially claimed it could close that deal in fiscal 2023 (which ends this June), but the acquisition was recently blocked by the Competition and Markets Authority (CMA) in the U.K. The CMA said the acquisition would give Microsoft an "incentive to withhold" its games from other consoles and "harm" its competitors in the nascent cloud gaming space.

Microsoft plans to appeal that decision, but the deal faces similar antitrust challenges in the U.S. and Europe. Unless Microsoft can clear those hurdles, it will need to walk away and pay Activision Blizzard a termination fee of $3 billion.

That setback could derail Microsoft's plans to catch up to Sony and Nintendo in the gaming market. As of this writing, Microsoft has only shipped just a little over 21 million Xbox Series S and X consoles, compared to about 36 million PS5 consoles and 124 million Nintendo Switches (which arrived three-and-a-half-years before Microsoft and Sony's newest consoles).

The strengths still outweigh the weaknesses

The end of the Activision Blizzard deal would represent a major setback for Microsoft, but it certainly won't offset or overshadow the growth of its cloud business. Microsoft is still a well-run company, its stock looks reasonably valued at 25 times forward earnings, and it will likely remain one of the top tech stocks for long-term investors.