Key Points
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Microsoft is moving Copilot, its AI assistant, from seat-based subscriptions to usage-based pricing, which lets it sell into a bigger market and earn more per customer.
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The number of Copilot customers that are consuming credits through usage-based billing grew over 75% last quarter, while daily users rose fivefold year over year.
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Microsoft (NASDAQ: MSFT) has long charged businesses for each worker using its software, a model known as seat-based pricing. The one reason to buy the stock for the next 10 years is that Copilot, its AI assistant, is moving from per-seat subscriptions to usage-based pricing. This could have a significant impact on Microsoft’s growth that isn’t yet priced into the stock.
The shift to usage-based pricing will allow Microsoft to sell into a bigger market and earn more per customer. The latest numbers in the earnings report show why this is a big deal.
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CEO Satya Nadella said, “The number of Copilot customers actively consuming credits through usage-based billing grew over 75% over the quarter.” Customers are increasingly using Copilot to perform higher-value work, driving daily users up fivefold year over year.
Overall, Microsoft’s revenue from agents and infrastructure (Azure, 365 cloud, productivity and server licensing, and industry solutions) grew 25% year over year to nearly $77 billion.
The momentum in Copilot is a positive signal for investors. It matters because investors have worried that AI would shrink the number of workers Microsoft can charge for, since it can make each worker more productive. But the recent results suggest usage-based offerings can keep revenue growing even when seat counts don’t. Microsoft’s 365 commercial cloud revenue grew 17% year over year on a reported basis, even though paid seats rose only 5%.
The stock trades at about 27 times forward earnings, and analysts expect earnings to grow about 16% annually over the next several years. That’s a reasonable price for a business whose revenue can scale with real work being done with AI over the long term.
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John Ballard 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.
