Piper Sandler Reiterates Microsoft at Overweight, $540.00 Price Target

Piper Sandler reiterated its Overweight rating and $540.00 price target on Microsoft following management meetings with the company’s IR team in Boston.

Conclusion. We hosted meetings in Boston last week with Jonathan Neilson (Head of Microsoft IR) and Danielle Criste (IR), walking away incrementally positive on 1) the ability for the multitude of recent Copilot enhancements (Model Choice, Copilot Cowork, WorkIQ) to help drive the expected 5M+ Copilot seat adds q/q for F4Q, 2) the conversion of AI capex to Cloud rev, 3) the ability for 1P models to drive higher mgns, 4) the updated OpenAI agreement as a tailwind to GMs, and 5) the LT shift to hybrid seat/usage apps monetization.

MSFT remains one of our top picks, well positioned to capitalize on both OpenAI and Anthropic’s growth.

Copilot Enhancements YTD Drive Differentiation. Copilot seats in F3Q totaled 20M (~4.4% of the M365 base; up from 15M in F2Q) and IR reaffirmed commentary from the F3Q call that MSFT expects to add more than 5M seats in F4Q.

Customers are opting to add Copilot mid-contract. Usage intensity remains encouraging, with Copilot usage stats tracking similarly to Outlook.

IR highlighted the significant Copilot enhancements in just a couple months that drive differentiation vs. the frontier model providers:

1) Model Choice: Copilot users can now choose between GPT or Claude models, allowing customers to pick the best model for specific use cases.

In late March, MSFT added Critique and Council to Copilot, tools that leverage both models in tandem to produce more accurate, exhaustive, etc. research than either model on its own (see our standalone note: here).

MSFT sees an advantage in being model agnostic, leveraging the best models as they emerge, with the door left open to Copilot leveraging additional 3P models (alongside 1P MSFT models) over time.

2) Copilot Cowork: MSFT recently introduced Copilot Cowork (similar to Claude Cowork) which provides a seamless experience across the different MSFT apps.

3) WorkIQ: WorkIQ allows Copilot to automatically access all data within an org’s existing MSFT stack (Teams, OneDrive, etc.) to deliver more context specific answers.

IR provided multiple anecdotes of customers seeing a benefit immediately, like a user citing Copilot proactively flagged missed emails from important customers that were relevant for an upcoming meeting.

4) Governance/Security. As an existing, trusted security vendor, MSFT sees an opportunity to provide identity mgmt for AI agents, just as it does for humans.

Azure Growth; Capex ROI. MSFT will continue to spend heavily on AI capex given demand outpaces supply.

On ROI, the LT expectation is that Microsoft Cloud rev growth should outpace the Capex spend.

When those two paths cross is a moving tgt, but the significant RPO balance ($627B), which carries a 2.5 yr avg weighted contract life, suggests sizable NT demand.

The main constraint to DC buildouts remains time/space. Continued on Page 2

Risks to Achievement of PT & Recommendation. Competition, attrition, regulation, data and privacy breaches, and currency fluctuations.

Company Description. The world’s largest cloud franchise with a first-mover advantage in Gen AI.

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