Some Investors Are Questioning the AI Trade. Microsoft Is Bucking the Trend

Artificial intelligence (AI) stocks are having a rough time lately as some investors question the high costs of building data center infrastructure. And it likely won't slow down any time soon. Estimates from S&P Global show that AI infrastructure spending could surpass $1.3 trillion globally next year.

And investors are increasingly concerned that spending all of this spending may not turn into significant sales or earnings for the leading AI companies.

But Microsoft (NASDAQ: MSFT) is bucking the downward trend. Its shares have gained around 8% over the past month on optimism about its Azure cloud computing growth and its latest Copilot AI update.

Here's why investors are right to be optimistic about Microsoft's long-term AI prospects.

Image source: The Motley Fool.

Azure growth proves Microsoft's AI investments are working

Microsoft reported its Q4 fiscal 2026 results in July and said at the time that "Customer demand continues to exceed available capacity" for its Azure cloud services.

The surge in demand for Azure services was driven by customers needing more AI capacity, resulting in Azure cloud revenue surpassing $100 billion for the first time -- a 41% increase from the previous year.

Microsoft's Intelligent Cloud revenue, which includes Azure, accounts for about 44% of the company's total revenue. So a significant increase in Azure sales is an important indicator that the company is making the right moves to tap into the rising demand for AI cloud services.

That's important for two reasons. The first is that the AI cloud market will accelerate, reaching an estimated $2 trillion globally by 2030. Microsoft's Azure is already a leading player, holding the second-largest global cloud market share at 21%.

Second, it shows that Microsoft's big AI investments are paying off. The company will spend about $175 billion this year on capital expenditures, most of it on AI infrastructure.

That's a huge sum of money, but Azure's rising sales and the $100 billion in annual revenue show that, at least so far, it's been money well spent. And management estimates that Azure revenue will increase by 45% in fiscal 2027, which should put to rest any worries investors have about Microsoft's ability to continue converting AI investment into sales.

Copilot proves Microsoft can still adapt to new software trends

Azure may make the headlines for Microsoft these days, but the company's software moves are also a big part of its AI strategy.

Microsoft's new Copilot app can run on a desktop, similar to Anthropic's Claude, and help users code, has more workplace integrations, and completes some tasks autonomously. Microsoft wants it to be the new "OS for work," and its long-standing appeal to enterprise users means it has a good chance of benefiting from this space for years to come.

Even before the new Copilot version launched, the app had 30 million paid subscribers, a 50% jump from just a few months prior.

All of this matters because enterprise companies are increasingly shifting their focus from traditional software to AI capabilities. Research firm Gartner said recently that companies no longer want new features; they want "better outcomes" from AI. With Microsoft's new Copilot, the company is leaning into that sentiment by putting AI at the core of its products.

With its current trajectory, Microsoft could likely double its paid Copilot seats by the end of fiscal 2027.

A great long-term AI play

With Microsoft's emphasis on AI enterprise software and its expanding Azure sales, the company is well-positioned to continue tapping into AI over the long term.

And considering that its shares have a trailing price-to-earnings (P/E) ratio of just 27 -- compared to the tech sector average P/E ratio of 33 -- Microsoft stock also looks like a relatively good deal right now.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and S&P Global. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.