Thinking Through the Upside Case: Microsoft Ahead of 360 Day
As we approach our annual Microsoft 360 Day tomorrow, Glen wanted to offer a clear and actionable lens on Microsoft’s investment case, especially for those newer to the equity markets. Microsoft has quietly executed one of the most successful early-stage monetization strategies in AI, while maintaining disciplined capital allocation and delivering on earnings.
Here are Glen’s 7 Strategic Insights….
1. Microsoft’s AI Business Is Real — and Growing Fast
Microsoft’s AI-related revenue is already at a $16.8B annual run rate, with most of it coming from Azure and Microsoft 365 Copilot. Importantly, enterprise AI adoption is still in its early innings, giving Microsoft significant room for long-term growth.
2. Azure Remains a Powerhouse
After a brief slowdown, Azure growth reaccelerated to 35% year-over-year, with AI driving 16 points of that growth. Azure is on track to be a 30%+ grower for the foreseeable future, positioning Microsoft as a foundational player in cloud + AI infrastructure.
3. AI Investment Is Maturing
While Microsoft has ramped capital expenditures to support AI infrastructure, the most aggressive phase of that investment cycle may be behind us. Free cash flow should stabilize and begin growing again in 2026, thanks to improved efficiency and margin leverage.
4. Valuation Is Still Reasonable
At a modest premium to the S&P 500, the company appears positioned for future earnings growth with a near-fully recurring revenue model (98% annuity mix). Microsoft has a strategic stake in OpenAI — the most important AI partner in the enterprise today.
5. Microsoft 365 Copilot Is an Underappreciated Monetization Engine
Copilot is on a $2.5B run rate but could grow to $18.5B by 2028. Given Microsoft’s massive Office user base (~436M commercial seats), even small adoption increases could have significant financial impact over time.
6. OpenAI Deepens the Competitive Moat
OpenAI, which quadrupled its revenue in 2024, is a key engine of Azure growth. As OpenAI expands workloads, Microsoft benefits directly from compute and infrastructure demand — a high-margin, high-retention revenue stream.
7. Long-Term AI Adoption Fuels Durable Upside
Microsoft is positioned at the center of the cloud + AI convergence. As enterprise customers ramp usage, workloads expand, and demand compounds. This creates a flywheel effect across Azure, Copilot, and platform services — a powerful long-term growth story.
Source: Bloomberg, Glen Daniel
This commentary is for informational purposes only and is not being provided in the context of an offering of any security, sector, or financial instrument, and is not a recommendation or solicitation to buy, hold or sell any security.