The adoption of artificial intelligence (AI) is gathering steam across multiple industries, which is not surprising as this technology has the potential to raise productivity and contribute significantly to the global economy in the long run.
McKinsey estimates that generative AI could increase labor productivity at an annual rate of 0.1% to 0.6% through 2040. PwC, on the other hand, is expecting AI to contribute $15.7 trillion to the global economy by 2030, of which $6.6 trillion will be on account of productivity gains. Investors would therefore do well to invest in companies that are leveraging AI to enhance productivity.
Microsoft (MSFT 0.26%) is one such company that is using AI to boost productivity, so it may be a good idea to buy it right now and hold it for a long, long time. Let's take a closer look at the reasons why.
NASDAQ: MSFT
Key Data Points
Microsoft's AI-driven productivity tools are witnessing solid demand
Microsoft has been making the most of its partnership with OpenAI to improve its workplace collaboration tools to enhance productivity. Last year, the tech giant introduced Microsoft 365 Copilot, a solution powered by large language models (LLMs) embedded in popular applications such as Word, Excel, PowerPoint, Outlook, and Teams.
From helping users create presentations in PowerPoint with the help of text prompts to analyzing data in Excel sheets to creating drafts in Word, Copilot is capable of increasing productivity in multiple ways. For instance, Microsoft claims that developers using Copilot on GitHub have witnessed an 88% jump in productivity. The good news for Microsoft investors is that the company has already started monetizing Copilot.
Users can buy a Copilot for Microsoft 365 subscription for $30 a month. More importantly, users are willing to pay for this offering, according to Microsoft management on the company's recent earnings conference call. For instance, Microsoft has 1.8 million developers paying for GitHub Copilot. It is adding paid developers to its platform at an impressive pace -- the number of GitHub Copilot users jumped 35% in the third quarter of fiscal 2024.
Microsoft points out that it is witnessing "increased adoption from businesses in every industry, including Itau, Lufthansa Systems, Nokia, Pinterest, and Volvo cars." Even better, the company says that existing customers have increased their usage of GitHub Copilot "after seeing productivity and code quality increases." CEO Satya Nadella remarked on the latest earnings call:
This quarter, we made Copilot available to organizations of all types and sizes from enterprises to small businesses, nearly 60% of the Fortune 500 now use Copilot and we have seen accelerated adoption across industries and geographies with companies like Amgen, BP, Cognizant, Koch Industries, Moody's, Novo Nordisk, Nvidia, and Tech Mahindra purchasing over 10,000 seats.
Microsoft is witnessing healthy growth in the productivity and business processes segment as a result, with year-over-year revenue growth coming in at 12% in the previous quarter to $19.6 billion. Office 365 Commercial revenue was up 15%, driven by an 8% increase in the number of paid users.
Additionally, Microsoft is targeting the lucrative customer relationship management (CRM) and enterprise resource planning (ERP) markets as well with its Dynamics 365 Copilot. Microsoft claims that this solution allows enterprises to reduce the time their employees spend performing clerical tasks such as responding to emails and creating a summary of meetings.
Moreover, Dynamics 365 Copilot can be deployed for multiple applications ranging from supply chain to e-commerce to digital marketing to customer service. The demand for this product is growing nicely, evident from the 23% growth Microsoft recorded in Dynamics 365 revenue last quarter.
As such, Microsoft is pulling the right strings to ensure that it is using AI tools to help boost productivity, and this could unlock a huge long-term growth opportunity for the company.
More reasons to buy the stock
AI-based productivity tools are just one way in which Microsoft is leveraging this technology to drive growth. The company's cloud business is also getting a nice boost thanks to AI. Microsoft's Azure revenue was up 31% in the previous quarter, which was higher than what the company was expecting. Microsoft pointed out that AI drove 7 percentage points worth of growth in the cloud business, up from the 6 percentage points worth of growth AI added in the second quarter of fiscal 2024.
For comparison, Microsoft's Azure cloud revenue was up 27% in the same period last year, which clearly indicates that the demand for AI-based cloud services is indeed giving the company a nice lift. Again, this is another market where Microsoft has immense growth potential that could supercharge its growth in the long run.
In all, Microsoft is capitalizing on AI adoption in multiple ways and it is witnessing tangible benefits, as its financials tell us. Investors looking to buy an AI stock should consider buying Microsoft right away -- its forward earnings multiple of 30 is in line with the Nasdaq-100's earnings multiple (using the index as a proxy for tech stocks).
