Is Copilot Microsoft's Secret Weapon in the AI Arms Race?

When investors discuss the major artificial intelligence (AI) hyperscalers, Microsoft (NASDAQ: MSFT) sometimes falls to the wayside. However, its Copilot AI platform is rapidly growing and might be its secret weapon in the AI arms race. Copilot is becoming a widely used AI application in the business world, mainly due to its ability to keep companies' internal, proprietary data private. This is becoming an issue for some places, and with Copilot maintaining data security, it's an easy one for IT departments to recommend.

But is it enough to make Microsoft a buy? Let's take a look.

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Microsoft is benefiting from the AI arms race in three ways

Microsoft has three different ways it can benefit from the AI arms race.

The first, as discussed above, is its Copilot platform. A free version of Copilot is available with all plans, but integrations with some of Microsoft's other apps are a paid add-on. During Microsoft's latest quarter, Copilot reached over 30 million paid seats. That's not an insignificant revenue contributor, and it shows that it's growing in popularity.

Another way Microsoft is benefiting is from its cloud computing service, Azure. Azure is one of the big three cloud computing providers and is typically ranked second among the companies in terms of market share. Azure is growing at a steady pace, increasing 43% in the last quarter. Microsoft is spending hundreds of billions of dollars on data center capital expenditures to increase its cloud computing capacity. That's the right move, because there is a monstrous demand backlog. Microsoft's remaining performance obligations rose to $678 billion in the quarter, and it is a reflection of how much computing capacity backlog there is.

A large amount of that is attributed to Microsoft's largest computing client: OpenAI. This is Microsoft's third way to benefit, as it's a major investor in OpenAI. Microsoft is estimated to own about a quarter of OpenAI, which could result in a huge payout if OpenAI goes public later this year.

Those are the three ways Microsoft can benefit from AI, although Copilot may be its most obvious one (and maybe not so secret a weapon). However, I think all three of these avenues combined are an excellent way to approach the AI build-out, and Microsoft is a viable AI investment. However, don't expect it to produce incredible returns, as it's not growing fast enough to mimic some of the faster-growing AI computing companies.

Keithen Drury has positions in Microsoft. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.