Artificial intelligence is revolutionizing how companies operate, and that could have major implications for Microsoft ‘s cloud business, according to Bernstein. As Microsoft launches new offerings and more users adopt the cloud, Bernstein expects the company’s cloud revenue to more than double. Currently, AI offerings touch about 42% of the company’s revenue, Bernstein said. An “up-sell opportunity” and expansion within in its suite of AI features known as Copilot should also contribute to Microsoft’s extensive cloud-revenue growth. “While it is early to size the economic impact of AI on Microsoft’s business, the green shoots are becoming visible as Microsoft launches a family of capabilities called Copilot,” analyst Mark Moerdler said in a note Tuesday. “The Copilot name, we believe, implies that these AI-enabled offerings will be more than a valuable assistant — they will be critical to operations going forward, in much the same manner as the copilot is critical to flying a large airplane.” MSFT YTD mountain Microsoft shares in 2023 Microsoft this year has stood at the forefront of the AI war with its multibillion-dollar bet on ChatGPT-maker OpenAI, facing off against competitors like Alphabet , which launched its own conversational chatbot to bet on the frenzy. A bet on AI — and growth stocks in general — has boosted the stock 28% in 2023. Along with its investment in ChatGPT, Microsoft rolled out AI capabilities for its Bing search engine earlier this year. CEO Satya Nadella called AI-powered search the biggest development for the company since the cloud in a recent interview with CNBC earlier this year. “This deep embedding of AI within most of Microsoft’s offerings is going to give Microsoft a distinct competitive advantage at a time when many competitors are cutting back on spending in response to slowing IT spending,” Moerdler wrote. How Microsoft can monetize AI Bernstein expects Microsoft to charge for AI where it adds “meaningful capabilities,” forecasting that the company could implement a 66% price increase for Copilot capabilities. He called AI the “next leg of growth” able to generate double-digits and surpass investor time horizons. Looking ahead, Moerdler sees two potential ways for Microsoft to monetize AI. He expects the company to charge directly for Copilot in areas where it remains a market leader and sees smaller growth opportunities. In markets with “green field,” or share-taking opportunities, the company will leverage AI technology, Moerdler said. Copilot is where the company should see the “largest near-term impact not just from a user perspective but also revenue generation opportunity (longer term Azure AI will be a much bigger revenue generator),” he wrote. “In fact, we would argue that Copilot is more of a threat to the existing search industry than Bing search.” Near-term, these AI capabilities will — and may already — be impacting gross margins, but those pressures should subside as the company monetizes AI and its efficiency improves. AI is already expected to account for 1% year-over-year growth in Microsoft’s Azure business next quarter, and it could become 10% of the segment’s growth and revenue overtime, Bernstein estimates. A 50% to 70% increase in price for Copilot and a 50% to 80% adoption over time this could generate $9.5 billion to $21.2 billion for Microsoft, the firm forecasts. Bing Chat, while smaller than Microsoft’s other offerings, should boost revenue in the billions between mid-single to low-teen digits within a year, Bernstein projects. Broadly speaking, Moerdler expects AI advancements in Microsoft’s cloud services unit to reshape the industry — and new announcements have likely only just begun. “While it is too early to model the full impact of this transformation on Microsoft’s financials, the revenue opportunities being created are very large and the upside for revenue, earnings, and [free cash flow] will be substantial,” he said. — CNBC’s Michael Bloom contributed reporting
