Microsoft’s AI service Copilot’s ‘Wave 2’ seen as a key catalyst by Wells Fargo

Wells Fargo Securities said Microsoft’s (NASDAQ:MSFT) M365 Copilot “Wave 2” showed progress across Office and new agentic capabilities, which should make a $30 value proposition more digestible.

The firm kept its Overweight rating and $515 target price on the stock and noted that it remains focused on tech advancements and view Copilot as the next key unlock for Microsoft.

On Monday, the U.S. tech giant released what it called the Wave 2 of Copilot, its generative AI service. The new features include Pages, wherein web data and work data come together. The company also added Copilot features across its Microsoft 365 apps, including Excel, PowerPoint, Teams, Word, OneDrive and Outlook. Copilot agents were also revealed.

Analysts led by Michael Turrin said that Microsoft launched M365 Copilot “Wave 2” featuring several enhancements to Excel, PowerPoint, and Outlook use cases, an upgraded engine (GPT-4o), and a vision for the user interface, or UI, for AI. Agentic was a key theme, aligning to recent AI announcements from Salesforce (CRM) and ServiceNow (NOW) (AI release Xanadu). While too early to call a standout in the apps layer, incumbents are taking steady steps forward and expect Microsoft to lead monetization at the application layer.

The analysts added that there were 3 vital announcements — Copilot Pages, a shared page where teammates can collaborate alongside an AI agent that has access to the web and corporate knowledge base; Copilot Agents is agentic AI designed to automate business processes; and thirdly Copilot in Excel is now generally available with expanded capabilities, like support for complex formulas and Python; new feature for Copilot in Outlook also stood out (auto prioritize emails).

Separately, the analysts noted that on Friday, OpenAI unveiled a new model called o1 model (Strawberry and Q), which excels at reasoning and was trained to answer complex questions and tasks, such as math, science, and coding, but is not as broadly applicable as GPT. Currently, there are two models available in beta, o1-preview (restricted version of full o1 model) and o1-mini (a smaller and cheaper model).

Turrin and his team think o1 could eventually unlock improvements in AI’s usefulness across math-related workloads (such as Excel, Power Platform, GitHub) and domain-specific (example healthcare) use cases. However, o1 is not yet ready for primetime seen by current cost (about three times more than GPT-4o), rate caps, and limited air time during the launch of M365 Copilot Wave 2. However, Microsoft did acknowledge plans to incorporate o1 in the future.

The analysts stated that they would show patience around AI revenue scaling at the application layer, but see ongoing developments as critical to long-term positioning. Next data point will be Salesforce’s vision and functionality for its AI tool Agentforce at the Sept. 17 Dreamforce keynote. For Microsoft, key events are earnings in late October and its flagship Ignite conference in mid-November.