Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Microsoft Is Winning the Enterprise AI Race in 2026
Transcript
- Lucas: Microsoft is up more than seven and a half percent in the last five trading days. That is the kind of weekly move you usually see from a small-cap momentum stock, not from a company that's already worth more than three trillion dollars. Luna: Yeah, the S&P 500 barely budged in the same period — up one point four percent. So what is driving Microsoft specifically? Lucas: The short answer is Copilot. Not the consumer version, but Microsoft 365 Copilot for enterprise. We are now in late May 2026, and the adoption numbers are finally crossing into territory that moves the revenue needle. According to recent disclosures, over four hundred thousand organizations have deployed Copilot — that's up from roughly a hundred thousand just six months ago. Luna: That is a hockey stick. And it's not just the count — it's the per-seat pricing. Thirty dollars a month per user on top of the existing E3 or E5 license. Lucas: Exactly. And Microsoft has been clever about bundling. If you buy Copilot as part of a broader Azure commitment, you get slightly better terms. But the base price stickiness is real. For a company with ten thousand knowledge workers, that's an incremental three hundred thousand dollars a month in spend — high margin, because the underlying model cost is dropping fast. Luna: So the thesis is that Copilot pulls through Azure consumption and vice versa. It's a flywheel. Lucas: Right. The commercial cloud revenue run rate is now above a hundred billion dollars annually. And the growth is accelerating, not decelerating. The Q3 fiscal 2026 results — reported in April — showed Azure revenue up 34 percent year-over-year, with AI services contributing about 8 percentage points of that growth. Luna: Eight points from AI alone. That is material. And it's why the stock is getting re-rated. Lucas: But here's where I want to push back a little. The stock now trades at roughly 35 times forward earnings. For a company growing revenue in the mid-teens, that multiple is not cheap by historical standards. Microsoft has traded at 25 to 30 times earnings for most of the last decade. Luna: So the bull case hinges on whether the AI tailwind can sustain that premium multiple — or even expand it. Lucas: And I think the next six months are a proving ground. The big risk is that Copilot adoption plateaus after the early adopter wave — the innovators and early majority. We need to see mainstream enterprise rollout, the kind where a company like a regional bank or a hospital system goes all-in. Luna: You mentioned margin earlier. What is the impact on operating margins if this scales? Lucas: That's the beautiful part for investors. Microsoft's operating margin has been hovering around 43 to 45 percent. Copilot revenue carries extremely high incremental margins because the bulk of the cost is compute, and that is already embedded in the Azure capital expenditure that they've been building out for the last two years. Luna: So the incremental dollar of Copilot revenue falls almost entirely to the bottom line. Lucas: Precisely. If Copilot adds, say, five billion dollars in annualized revenue by the end of fiscal 2027 — which seems plausible given the current adoption curve — that could add roughly two cents to earnings per share. That is not life-changing for a company with twelve dollars of EPS, but it signals that the AI monetization engine is real. Luna: And it also changes the narrative. For the last two years, investors have been asking 'where is the AI revenue?' Now Microsoft is giving a clear answer. Lucas: Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes. Luna: Yeah, we don't run ads, so it's really just listeners who find value in the show and decide to support. It keeps us independent. Lucas: And it lets us keep digging into the numbers without worrying about sponsor messaging. So thank you to anyone who's part of that. Back to Microsoft — the other factor this week is that the broader market is rotating into quality. The NASDAQ is up two point four percent in the last five days, but the Dow is barely positive. That tells me money is chasing growth with proven business models. Luna: Which is exactly the Microsoft playbook. Meanwhile, Apple is up one percent, Alphabet is down. So within big tech, there is clear differentiation. Lucas: And the differentiation comes down to one thing: does the AI investment show up in the income statement? Microsoft showed it in the April quarter. Alphabet's cloud growth was slower, and their AI product rollout has been more fragmented. So the market is voting with its dollars. Luna: What about the risk of antitrust or regulatory scrutiny? Microsoft has mostly escaped the attention that Google and Meta have faced, but with this kind of market power in enterprise AI, do you think that changes? Lucas: It's a risk, but not a near-term one. The FTC under the current administration has been more focused on consumer tech and social media. Enterprise software is lower on the priority list. And Microsoft has been politically savvy — they've made some quite big investments in AI safety and in workforce retraining partnerships. Luna: So the bull case is intact: strong product, accelerating revenue, high margins, manageable regulatory risk. What is the bear case in five sentences? Lucas: One: the multiple is elevated and any earnings miss could trigger a sharp correction. Two: Copilot adoption could slow if enterprises struggle to measure ROI — we've heard anecdotes of low usage rates inside some early adopter companies. Three: competition from Google's Gemini for Workspace and from new ai native tools could erode pricing power. Four: the capital expenditure cycle is still ramping, and if demand softens, those fixed costs become a drag. Five: the stock is so large that it's hard to compound at double-digit returns from here unless the AI opportunity is truly massive. Luna: That is a fair list. But for a long-term investor, the core thesis — that Microsoft will be the dominant platform for enterprise AI — is hard to argue against. Lucas: I think that's right. And what I like about this moment is that we have real data to debate, not just PowerPoint slides. Four hundred thousand organizations. Thirty-four percent Azure growth. A hundred billion in commercial cloud run rate. Those are concrete numbers that anchor the conversation. Luna: So the question going forward is not whether AI matters for Microsoft, but how much it will matter in the next two years. Lucas: Exactly. And we'll be watching the July earnings call closely for the next data point. For now, the stock's message is clear: the AI trade has a new leader, and it's not the flashiest name — it's the one selling the picks and shovels to every enterprise.