There's no denying the continuing buzz surrounding artificial intelligence (AI). The technology first attracted public interest early last year for its ability to create original content and automate a growing number of time-consuming and mundane tasks, thereby making workers more productive.
In the company's 2023 shareholder letter, Microsoft (MSFT 1.82%) CEO Satya Nadella addressed this paradigm shift, saying, "This next generation of AI will reshape every software category and every business, including our own."
While that might sound like hyperbole, there's a growing body of evidence that suggests that the process has already begun. And while estimates vary wildly, the potential economic impact is eye-opening. Generative AI could be worth between $2.6 trillion and $4.4 trillion annually, according to global management consulting firm McKinsey & Company. Companies at the leading edge of this trend will participate in this potential windfall, as will their shareholders.
Interestingly enough, Microsoft is one such company already innovating in the era of AI.
Image source: Getty Images.
Microsoft is my Copilot
AI has been around for decades, but the abilities of generative AI take that up a notch. The most in-demand use cases (right now) include outlining data; creating original images, text, and music; summarizing and drafting email responses; creating presentations with a few prompts; and drafting and debugging computer code. And new and intriguing use cases continue to join the fold.
Microsoft jump-started its creation of generative AI tools with a strategic partnership and stake in ChatGPT creator OpenAI, a move that now seems prescient. Microsoft quickly found ways to integrate AI across a broad cross-section of its most widely used products, making them even more useful.
The crown jewel of these efforts is Copilot, Microsoft's AI-powered helper. What some investors may not realize is that Copilot isn't just one, but a growing suite of job-specific digital assistants that are automating an increasing number of menial tasks. The flagship version, Copilot for Microsoft 365, helps users of the company's productivity software become even more effective.
Last month, Microsoft released Copilot for Service and Copilot for Sales, offering "role-specific insights and actions to streamline business processes, automate repetitive tasks, and unlock creativity." The company was quick to point out that these versions also integrate with the most widely used contact center and customer relationship management (CRM) systems, including ServiceNow and Salesforce.
The company is currently testing Copilot for Finance, which helps review financial transactions and data for irregularities, create financial reports from the data, and use the information to generate presentations.
The initial evidence suggests this strategy has been wildly successful. A survey of early users found:
- 70% of Copilot users admitted to being more productive.
- 68% said their work quality improved.
- 64% spent less time dealing with email.
- 85% reported faster first drafts.
- 75% said Copilot helped them find digital files faster.
Perhaps most telling was that 77% of respondents said once they started using Copilot, they didn't want to stop.
The evidence suggests that Microsoft has only just begun to unleash the vast potential of its AI-powered assistant, which could potentially generate billions of dollars in incremental revenue. Just last week, Evercore ISI analyst Kirk Materne updated his estimates, suggesting Microsoft's generative AI efforts could produce incremental revenue of $143 billion by 2027. For context, Microsoft had total revenue of $212 billion in fiscal 2023 (ended Jun. 30, 2023), suggesting a potential revenue boost of as much as 67% over four years.
To be clear, plenty would have to go right for Microsoft to achieve this lofty benchmark, but it helps illustrate the magnitude of the opportunity.
Grabbing cloud market share
Recent results suggest that AI is also having a halo effect on Microsoft Azure, the company's cloud infrastructure business.
In its fiscal 2024 second quarter (ended Dec. 31, 2023), Microsoft revealed that cloud services revenue climbed 30% year over year -- faster than both Alphabet's Google Cloud and Amazon Web Services (AWS), which grew 26% and 13%, respectively. Microsoft revealed that six percentage points of that growth was driven by demand for AI services. That was up from 29% growth in the previous quarter, which got a three percentage point-boost from AI.
This suggests that not only is Copilot a runaway hit, but it's also luring customers to Microsoft's cloud platform
A compelling opportunity
Microsoft stock has jumped 74% since the beginning of last year, more than double the gains of the S&P 500. That isn't an anomaly either, as the stock has surged 985% over the past decade, far outpacing the 177% gains of the broader market.
Despite its distinguished track record, Microsoft stock is still relatively inexpensive, selling 35 times forward earnings and 11 times next year's sales. While that represents a slight premium to the overall market, the magnitude of the opportunity represented by cloud computing, AI, and Copilot shows why Microsoft is worthy of a premium.
