Microsoft is well-positioned to ride the wave of artificial intelligence (AI) growth without necessarily developing the world's most powerful AI model, according to a recent Morgan Stanley report. The tech giant's strategy of providing the necessary infrastructure, data platforms, and workplace tools is paying off, with its cloud business experiencing significant growth. In the fiscal fourth quarter, Microsoft reported a 18% revenue increase to $90 billion, with Azure and other cloud services seeing a 43% growth rate. This growth is driven by a shift in the market towards lower-cost AI models that can be downloaded and operated independently, offering businesses more flexibility and cost savings.

The use of these open-source AI models is becoming increasingly popular, with 65% of token volume among the 50 most popular models on OpenRouter, up from 38% a year earlier. This trend aligns with a McKinsey survey indicating that 63% of technology leaders are now using open-weight models alongside proprietary systems. The falling costs of accessing frontier-level AI intelligence, which dropped approximately 1,000-fold over two years, suggest that more organizations will adopt AI, potentially increasing usage and revenue for Microsoft's cloud and software platforms.

Microsoft’s own data supports this trend, with its Foundry service surpassing 100,000 customers and doubling its revenue during the fiscal fourth quarter. The number of customers using models from multiple providers has increased fivefold since the beginning of the year. Morgan Stanley highlights Microsoft Fabric, a platform combining data management and analytics capabilities, which reached an annual revenue run rate of $2 billion while growing approximately 60%. This platform is now used by over 17,000 customers, a 60% increase from the previous year.

Corporate technology leaders are also showing a preference for Microsoft’s broader AI offerings. In Morgan Stanley’s AlphaWise survey, 47% of chief information officers identified Microsoft as their preferred vendor for developing custom AI applications, compared to 10% for both Amazon and Google. Additionally, 88% of surveyed CIOs expect to use Microsoft 365 Copilot within the next year, up from 72% a year earlier. These figures indicate strong potential for Microsoft to benefit from the widespread distribution of AI through software that many businesses already rely on.

While competitors like Amazon and Google offer similar capabilities with their Bedrock and Gemini Enterprise Agent Platform services, Morgan Stanley believes Microsoft’s combination of cloud computing, data management, security products, and workplace software gives it an edge. However, the company’s substantial investment requirements, projected to reach $175 billion in capital expenditures by fiscal 2027, raise questions about whether the increased AI usage will generate enough revenue to justify this spending. The challenge for Microsoft is to maintain its growth momentum while continuing to innovate and meet the evolving needs of businesses in the AI-driven future.

Originally reported by Rolling Out