Microsoft AI revenue mix likely has ‘very healthy’ margins: Bernstein

Microsoft (NASDAQ:MSFT) was one of the early beneficiaries of the artificial intelligence spending craze. But with the stock underperforming its peers and the broader indexes in 2024, research firm Bernstein Societe Generale said it is “getting more constructive” on the tech giant, pointing to what are believed to be “very healthy” AI-related margins.

Microsoft’s AI revenue comes from its software-as-a-service Copilots (excluding GitHub Copilot, which is part of Azure) and Azure AI, Bernstein analyst Mark Moerdler said. “We break the numbers apart and find that the revenue will be more stable than most would expect and less exposed to startups training [large language models],” Moerdler wrote in a note to clients. “The mix suggests that margins should also be very healthy for Microsoft AI (and not a drag to Microsoft margins).”

“With Microsoft’s stock having gone nowhere for months we are getting much more constructive on the setup and believe that within less than a year investor sentiment will swing back toward – you have to own Microsoft,” he continued.

Moerdler, who has an Outperform rating and $511 price target on Microsoft, believes Office 365 at roughly one year has reached an adoption rate of between 0.7% and 1% and has an annual revenue run rate between $1B and $1.5B. This would make it one of the fastest enterprise solutions to hit the $1B mark, he said.

“While smaller than most hoped by the point we believe that it will continue to grow and grow at a healthy rate for many years to come,” he wrote.

AI revenue breakdown

The company said previously that its AI revenue run rate was greater than $10B as it exited the fiscal second quarter of 2025.

The largest chunk of that is Azure AI, believed to be roughly $9.7B. Included in that is Azure OpenAI, believed to have a revenue run rate between $5.1B and $5.8B.

There are also OpenAI’s fees to Microsoft for inferencing. Based off media reports that that OpenAI could generate $3.7B in revenue this year (including $2.7B from ChatGPT) and that it’s inferencing cost for 2024 was around $2B, Microsoft could be generating around $2.5B to $3B in inferencing revenue in fiscal 2025, Moerdler said.

And lastly, GitHub Copilot is estimated to have a $1B to $1.1B run rate business next quarter, Moerdler said.

“The bottom line here is that MSFT’s has essentially provided a ceiling for potential ‘paper’ losses from OpenAI,” Moerdler wrote. “More importantly, it gives investors confidence that MSFT has not provided a blank check to OpenAI. And, any future spending on OpenAI could be monitored [sic] through [a] public funding round.”