“Boring” merchandise could make for income that funds riskier bets.
In January 2024, Workplace 365 quietly reached 400 million paid seats. Microsoft (MSFT 0.26%) merchandise are as built-in into our skilled lives as conferences that might’ve been emails, however these “boring” and decades-old instruments are the gasoline Microsoft is utilizing to compete within the synthetic intelligence (AI) race.
As AI progresses and automates away chunks of the skilled world as we all know it, the legacy suite of Microsoft 365 merchandise exhibits no indicators of slowing down. This capability to quietly and reliably generate income is funding Microsoft’s riskier AI bets.
Workplace merchandise generated $54.9 billion in fiscal 12 months 2024 (the 12 months led to June 2024). That was 22% of all of Microsoft’s income. Microsoft 365 will preserve the corporate on the leaderboard of AI innovators for years to return. That is nice information for long-term Microsoft traders.
Picture supply: Getty Photos.
Microsoft’s lagging AI technique
Microsoft remains to be taking part in catch-up on the subject of generative AI. OpenAI leads with greater than 200 million weekly lively customers and set the gold normal with the discharge of ChatGPT in 2022. Alphabet‘s Google and Meta Platforms each have fashions practically equal to OpenAI.
In comparison with these firms, Microsoft bought a late begin in deciding on an AI technique. Nonetheless, it has since closed the hole considerably by partnering with competitor OpenAI and, as of the tip of 2024, was starting to construct fashions in-house.
Microsoft additionally bought billions in Nvidia chips and continues to innovate on its cloud computing platform, Azure, and agentic powerhouse, Copilot. These strategic strikes are, to date, conserving tempo with the opposite main gamers within the AI trade.
Microsoft requires immense quantities of capital to stay aggressive within the AI panorama. Luckily, its decades-old productiveness and enterprise strains are the secure engine propelling Microsoft into its new, automated period.
The Workplace moat
Usually, when one thinks of a legacy enterprise, it is of an outdated, shrinking portion of income. That isn’t the case with Microsoft’s Workplace merchandise. Microsoft 365, together with the functions Excel, Phrase, PowerPoint, Groups, and Outlook, remains to be rising by double digits 12 months over 12 months.
This means these product strains will not be solely right here to remain, however are so universally adopted by companies and people alike that it will be practically not possible to dethrone them anytime quickly.
These merchandise are additionally largely recession-resistant, as companies are unlikely to chop them in an financial downturn. Microsoft additionally switched to a subscription mannequin greater than a decade in the past, making income from these strains of enterprise terribly predictable and reliable.
The numerous development within the legacy merchandise can be nice information for the capital-intensive investments Microsoft might want to proceed making for the following a number of years. Microsoft experiences that it is on monitor to take a position roughly $80 billion to construct out AI-enabled information facilities for coaching and deploying AI fashions and functions.
Microsoft’s AI income is exploding
In its earnings name on July 30, Microsoft revealed Azure’s revenue for the primary time: a whopping $75 billion, a rise of 34%, based on chairman and CEO Satya Nadella.
The CEO added, “Cloud and AI is the driving pressure of enterprise transformation throughout each trade and sector. We’re innovating throughout the tech stack to assist prospects adapt and develop on this new period.”
Microsoft’s market cap is approaching $4 trillion, and there appears to be fairly a little bit of room left for development, notably if the corporate’s massive AI bets repay.
Microsoft stays a prime competitor
For traders, Microsoft stays a stable long-term play, largely due to the secure merchandise customers have recognized for years. With a quarterly dividend of $0.91 per share, traders are rewarded on each the worth and development facet, although the dividend yield is beneath 1%. Microsoft’s burgeoning agentic and progressive applied sciences will proceed to provide large income alongside mature, dependable merchandise.
General, Microsoft’s whole income elevated 18% from This fall 2024 to This fall 2025. There’s loads of danger related to investing in AI applied sciences, however because of Microsoft’s regular strains of enterprise, the draw back is way lower than that of many rivals.
Catie Hogan has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Alphabet, Meta Platforms, Microsoft, and Nvidia. The Motley Idiot recommends the next choices: lengthy January 2026 $395 calls on Microsoft and quick January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure coverage.
