Looking back on 2023, this will likely be remembered as the year artificial intelligence (AI) came of age. There have been plenty of headlines introducing tales of productivity gains made possible by recent advances in generative AI. Those gains have come from the ability of these algorithms to create original images and content, summarize and draft emails, perform business analytics, and even draft and correct computer code. That has led to a virtual stampede of businesses trying to integrate these tools so they too can benefit from the AI revolution.
For all the potential, there have been very few sure things for AI-focused investors. Nvidia has been one of the few clear from this trend, as its graphics processing units (GPUs) are a critical component in the development of these next-generation AI systems. And yet the triple-digit revenue growth in the most recent quarter has put some investors off because of Nvidia's soaring valuation.
There are very few other clear options for winners among the AI-related stocks -- until now.
Image source: Getty Images.
Enter Microsoft's Satya Nadella
Microsoft (MSFT -1.57%) was among the first to recognize the significant opportunity resulting from these latest developments in AI. The company invested $13 billion in ChatGPT creator OpenAI. It was also fast off the blocks to develop tools for its software-as-a-service (SaaS) customers and users of its cloud infrastructure service, Microsoft Azure. Yet it was difficult to quantify these moves or get a clear picture of how quickly the company would begin to monetize its significant investment.
In a conference call to discuss the results of its blockbuster fiscal 2024 first quarter (ended Sept. 30), CEO Satya Nadella mentioned several informational tidbits that suggest just how big this opportunity is for Microsoft and how the company plans to profit. And what he had to say raised eyebrows.
Microsoft serves millions of users
Microsoft Copilot, the company's AI-fueled productivity assistant, was originally released on GitHub and has caused quite a stir. Nadella revealed that Microsoft already had over "1 million paid Copilot users and more than 37,000 organizations that subscribe to Copilot for business."
Equally impressive is the uptake from big business, with "tens of thousands" of users, as 40% of the Fortune 100 have adopted Copilot as part of Microsoft's early access program. Nadella added, "Customers tell us that once they use Copilot, they can't imagine work without it, and we are excited to make it generally available for enterprise customers next week."
The healthy appetite for Microsoft's AI tools is showing up in the company's results. Azure Cloud revenue rose 29% year over year, up from 26% growth sequentially. Microsoft CFO Amy Hood was clear that Azure's accelerating revenue growth was fueled by "higher-than-expected AI consumption."
More dollars makes sense
Microsoft doesn't disclose specifics on the size of its Azure cloud. Estimates suggest the company controlled about 26% of the cloud infrastructure market in the second quarter, which would amount to roughly $19 billion, according to data compiled by research firm Canalys.
Furthermore, back in July, the company revealed that Copilot will cost $30 per user per month for subscribers on Microsoft 365 -- the enterprise edition of its Office suite of productivity tools. This pricing applies to those on subscription plans that vary in cost from $12.50 to $57 per user per month. This suggests a big uptick in potential revenue growth for Microsoft.
Wedbush analyst Dan Ives estimates that as much as 50% of Microsoft's installed base of customers could adopt its AI tools over the coming three years. Dan Loeb of hedge fund Third Point estimates that Copilot could cause Microsoft's revenue to surge by "$25 billion or more in software sales alone." Meanwhile, Evercore ISI analyst Kirk Materne went further, estimating that integrating AI across its portfolio of offerings could generate $100 billion in incremental revenue by 2027.
It's still early days for AI, and earlier still for Microsoft's efforts to monetize these applications, but the company is off to a good start. What's clear from these early results is that this could be the beginning of the next phase in Microsoft's already incredible growth story, and AI investors should be buying the stock hand over fist.
