There's a strong argument that 2023 was the year artificial intelligence (AI) came of age. Just two months after its introduction, ChatGPT, the brainchild of startup OpenAI, became the fastest-growing consumer app in history, attracting an estimated 100 million users.
Since that auspicious debut, generative AI has spread like wildfire. Microsoft (MSFT 0.50%) was among the first to recognize the potential of these next-generation chatbots. The company moved quickly, increasing its investment in OpenAI to $13 billion and integrating AI tools across a broad cross-section of its products and services.
A great example of those efforts is Copilot, Microsoft's AI-powered digital assistant, which was designed to make workers more productive. Microsoft's early access program suggests Copilot is a wild success, revealing that more than 40% of the Fortune 100 were using Copilot. And now, Microsoft has developed a brilliant strategy that could sending its AI revenue soaring.
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A strict code
It might come as a surprise to investors that the very first Copilot was introduced in late 2021. GitHub, a subsidiary of Microsoft, partnered with Open AI to develop a tool that could write and debug computer code as a way to automate some of the repetition that was integral to code writing. This code-completion tool was trained on GitHub's massive code collection. A test conducted in late 2022 revealed that developers who used GitHub Copilot were 55% faster than those who didn't.
As a result of this wildly successful test, Microsoft developed an enterprise version of this tool for customers that builds off Copilot's expertise, further training Copilot on their proprietary code libraries, making them even more productive. That has made GitHub Copilot the "most widely adopted AI coding system available," according to GitHub CEO Thomas Dohmke.
That framework acted as a springboard for many more Copilots to come.
A Copilot for every occasion
Microsoft's flagship Copilot, or at least the best known, is Copilot for Microsoft 365. The AI assistant is deeply integrated into the company's Office suite of productivity tools, designed to make its users even more efficient and productive.
In a blog post released early last year, Microsoft described just a few of the capabilities of its 365 Copilot: "Copilot jump-starts your creativity in Word, analyzes data in Excel, designs presentations in PowerPoint, triages your Outlook inbox, summarizes meetings in Teams -- whether you attended or not -- and so much more."
The early results suggest that Copilot for Microsoft 365 could unleash a wave of productivity increases that has customers lining up to use it. It's important to note that the research, which included surveys and experiments, was conducted by Microsoft, and the company has a vested interest in positive results. That said, the results were nonetheless astonishing:
- 70% of users claimed to be more productive.
- 68% said Copilot improved the quality of their work.
- 29% of users said they were speedier in completing a series of tasks, which included searching, writing, and summarizing.
- Users claimed they could catch up on a meeting they missed four times faster.
- 85% claimed Copilot helped complete a first draft more quickly.
- 75% said it helped them find files faster.
- 64% said it reduced the time processing email.
- Perhaps most importantly, 77% said that once they used Copilot, they didn't want to give it up.
The evidence appears to show that Microsoft has a winner on its hands with Copilot, but this could be just the beginning.
A host of new Copilots
Just last month, the company introduced a number of new, industry-specific Copilots, which will probably expand the market for these AI-fueled digital assistants.
Microsoft Copilot for Sales and Copilot for Service bring "role-specific insights and actions to streamline business processes, automate repetitive tasks, and unlock creativity." The company also noted that both options integrate seamlessly with customer relationship management systems, including those from Salesforce and ServiceNow.
Just last week Microsoft previewed Copilot for Finance, which helps users review transactions and data sets for anomalies and risks, generate reports from the numbers, and use the data to create presentations. This shows that Microsoft isn't resting on its laurels and is sprinting forward to capture the budding AI market.
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Key Data Points
Microsoft's accelerating AI growth
The broad adoption of Copilot could also lead a wave of new users to adopt Microsoft Azure, the company's cloud infrastructure offering. Indeed, there's evidence that suggests that's already happening. In Microsoft's fiscal 2024 second quarter, ended Dec. 31, the company reported that its cloud services revenue grew 30% year over year, outpacing both Amazon Web Services and Alphabet's Google Cloud, which grew 13% and 26%, respectively.
Perhaps more importantly, however, was the revelation that six points of that growth was the result of growing demand for AI services. It also marked an acceleration from 29% growth sequentially, including three points of growth from AI. The data suggests that its AI offerings could cause a wave of migration to Azure Cloud.
A vast AI opportunity
It's still early days for AI, and estimates vary wildly regarding the size of the opportunity, but even the most conservative forecasts start at $1 trillion and go higher from there. Microsoft-specific estimates are increasing rapidly.
Dan Loeb, founder of hedge fund Third Point -- which holds a Microsoft stake worth $839 million -- says the company could generate "$25 billion or more in software sales alone." Estimates from Evercore ISI analyst Kirk Materne are even more robust, suggesting generative AI could add more than $100 billion to Microsoft's results by 2027.
Considering the rapid introduction of Microsoft's new and innovative products, those estimates could well end up being conservative. By quickly expanding its AI footprint, Microsoft is securing a vast and profitable beachhead in the AI revolution.
