"Code Red": Microsoft CEO Satya Nadella Is Reportedly Leading an Overhaul of Copilot. Should Investors Buy the Stock?
Key Points
Copilot is a huge part of Microsoft's artificial intelligence strategy.
But so far, its paying users are still a small percentage of total Microsoft 365 subscribers.
In a competitive AI world, investors want more from Copilot, which is why the stock has struggled, and CEO Satya Nadella appears to be taking action.
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One of the big disappointments in the stock market lately has been Microsoft (NASDAQ: MSFT), which recently closed out its worst quarter since 2008. The stock is down over 17% in the past six months, a big move for one of the world's largest companies.
Part of the sell-off can be attributed to the 2026 software rout, with investors concerned that artificial intelligence (AI) will easily replicate similar products and solutions, eroding margins and, in turn, pricing power.
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Despite the negative sentiment of late, Microsoft could be one of the largest beneficiaries of AI. Unfortunately, Microsoft's generative AI assistant Copilot has so far disappointed. Recently, reports have circulated that Microsoft CEO Satya Nadella has launched an overhaul of Copilot dubbed "Code Red." Should investors buy the stock?
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Copilot is a key part of Microsoft's AI strategy
Copilot is many things. It's an AI conversational chatbot. It can help automate workflows. It can create a range of content. It can be integrated into Microsoft's various 365 applications, such as Word, Excel, PowerPoint, and Teams. It can be used for coding and to help developers build AI applications.
Yet, despite its capabilities, Copilot has struggled to gain the traction investors would like, especially given its positioning as a competitor to ChatGPT and Anthropic's Claude. On Microsoft's most recent earnings call, Nadella told analysts that the company now has "15 million paid Microsoft Corporation 365 Copilot seats and multiples more enterprise chat users."
Furthermore, the company had 4.7 million paid GitHub Copilot Pro Plus subscribers, up 75% year over year. GitHub Copilot is Microsoft's AI-powered coding assistant. Still, investors seem disappointed, given that Microsoft 365 has 450 million paying subscribers. One would think cross-selling would be more effective.
As a result of the struggles, BNP Paribas analyst Stefan Slowinski said in a research note that Nadella is leading an overhaul dubbed "Microsoft's Copilot code red," to boost performance and improve the user experience. This will include the rollout of Microsoft 365 E7, with a fully integrated AI stack so AI can be used across the entire business.
Other products will follow, including Agent Mode, Copilot Cowork, Critique, Council, and Agent 365. Slowinski sounded optimistic about the new AI products, noting that he and his team have received more positive feedback and sentiment on these Copilot tools and features.
Slowinski also said that the software sell-off has not spared Microsoft; investors have been frustrated by Copilot, concerned that Microsoft could end up in a contest with OpenAI and Anthropic, and are still looking for Microsoft to strike the right balance between capital expenditures, free-cash-flow growth, and AI monetization.
"This combined with continued attractive FCF (free cash flow) margins (~20%) vs hyperscaler peers (0%), along with renewed confidence in Copilot, and Azure beats could create a formula for Microsoft's stock to get back on track," Slowinski wrote.
Should investors buy Microsoft stock?
Copilot remains a pain point for the stock, and investors will likely need to see proof of further traction before they believe it can succeed in the competitive landscape. On the consumer side, Copilot doesn't seem to have nearly the same recognition as ChatGPT and Claude.
However, the company runs many great software businesses and is well-positioned to benefit from AI, whether through Copilot or its Azure cloud services business, which helps clients build and run AI applications.
While AI remains a significant threat to the software moat, Microsoft 365 is one of the, if not the, stickiest enterprise suites of tools. I strongly suspect that if its moat is threatened, Microsoft has the resources and AI capabilities to help bolster and maintain that moat. Long-term investors can certainly buy Microsoft stock.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.
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