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Investing.com -- Microsoft sees continued strong demand for AI services, particularly within its Azure cloud platform, as the company refines its data center expansion strategy, TD Cowen said following investor meetings with Microsoft’s executive.
The company has not significantly altered its approach to capital expenditure on data centers and computing infrastructure, despite entering a different phase of development.
Two years ago, Microsoft (NASDAQ:MSFT) rapidly expanded its data center capacity to meet surging AI demand. Now, with supply catching up, the company expects capital spending growth to slow and align more closely with overall Azure demand from fiscal 2026 onwards.
Microsoft’s latest guidance for its fiscal fourth quarter assumes AI demand will remain strong, though growth in non-AI workloads has lagged, particularly in its small and mid-sized business segment.
This weaker performance has been linked to changes in go-to-market partner incentives earlier in the year. Management is working to improve balance between AI and non-AI services, but the impact is expected to take time.
Adoption of Microsoft 365 Copilot, an AI-powered productivity assistant, is progressing well. Customers in the initial rollout have significantly expanded their usage, with a tenfold increase in licenses since launch.
Microsoft has also introduced a new freemium pricing model for Copilot Chat, which it expects will drive broader adoption and additional revenue opportunities.
Regarding its relationship with OpenAI, Microsoft said key aspects remain unchanged. The companies continue to share revenue from OpenAI’s models, and Microsoft retains exclusive rights to run OpenAI’s APIs on Azure.
A new development is that Microsoft now has the right of first refusal on OpenAI’s capacity needs, allowing it to decide whether to provide the necessary infrastructure.
TD Cowen remains confident in Microsoft’s strong positioning in public cloud services, with Azure expected to be the company’s main growth driver.
Brokerage also sees continued strength in Office 365 Commercial, which it believes is the world’s largest software-as-a-service business. Broader digital transformation trends should continue to benefit Microsoft’s commercial cloud operations.