Piper Sandler has lifted its price target on Microsoft (NASDAQ: MSFT) from $550 to $610 while keeping an "Overweight" rating on the stock.

The core reason behind the higher target is the firm's growing confidence in the future monetization potential of Microsoft's Microsoft 365 Commercial Cloud business. After Microsoft announced the launch of its "Super App," rolled out the new E7 tier, and gradually expanded usage-based billing for Copilot and Cowork, Piper Sandler rebuilt its framework for assessing the revenue potential of M365 Commercial Cloud.

The E7 upgrade alone can deliver meaningful revenue growth

Piper Sandler estimates that if just 10% of existing E5 users upgrade their seats to E7, Microsoft could add roughly $2 billion in annualized revenue each year. The immediate impact of this shift on Microsoft's overall results remains limited for now, but as enterprises gradually migrate to higher-tier packages, its revenue contribution is expected to keep expanding.

This means Microsoft's future M365 growth no longer depends solely on adding new users; it can also raise revenue per user by moving existing enterprise customers to higher-tier packages. For a company that already has a massive enterprise user base, this kind of "upselling" model allows it to keep growing commercial cloud revenue without significantly expanding its customer count.

Copilot and Cowork form a second AI monetization curve

Compared with traditional per-seat charging, Piper Sandler is paying closer attention to the expanding usage-based billing model for Copilot and Cowork. The firm expects that by the end of fiscal 2028, new consumption-based revenue from Copilot and Cowork could reach an annualized run rate of about $2 billion.

Piper Sandler notes that this revenue scale is roughly equivalent to the current per-seat Copilot business, but the time needed to reach that same scale could be only half as long. In other words, the monetization pace of Microsoft's AI software business may be accelerating.

In the past, Copilot was mainly charged through fixed subscription fees. With usage-based billing, if enterprises increasingly apply AI to complex tasks, automated processes, and agentic applications, Microsoft's revenue can grow in tandem with actual usage volumes.

Microsoft's edge lies in making AI tasks "cheaper to complete"

Piper Sandler believes the value of Copilot and Cowork is not just about calling the most advanced large models, but about Microsoft's ability to use its own "harness" and automatic routing capabilities to select more suitable models and compute paths for different tasks.

Simply put, not all tasks require calling the most expensive frontier models. Microsoft can automatically assign different work to lower-cost or more efficient models based on task complexity, thereby reducing the compute cost needed to complete the same task.

If this model can scale, Microsoft can both increase the frequency of AI product usage and improve the unit economics of its AI business while maintaining customer experience. This is also an important reason why Piper Sandler is more optimistic about Copilot's commercialization prospects.

M365 is shifting from "selling seats" to "seats plus usage"

What Piper Sandler's report truly emphasizes is that Microsoft's enterprise software business model is changing. Traditional M365 mainly charges by user seat, with enterprises paying a fixed fee per user after purchasing different tiers of subscription packages.

With the launch of E7 and the expansion of usage-based charging for Copilot and Cowork, Microsoft may in the future have two layers of revenue at the same time: the first layer comes from upgrades from E5 to higher-tier packages such as E7, raising fixed subscription revenue per user; the second layer comes from increased actual usage of AI agents and Copilot, allowing revenue to keep growing as enterprise AI workloads expand.

This means the upper limit of revenue that the same M365 user can contribute in the future has been further opened up.

The price target hike comes not only from earnings forecasts but also from valuation expansion

Piper Sandler's decision to raise Microsoft's price target to $610 is not simply a matter of lifting earnings estimates. The firm also raised its assumptions for Microsoft's enterprise value to operating cash flow ratio, or EV/OCF valuation multiple.

The logic behind this is that as M365's growth outlook becomes clearer, the revenue visibility and long-term growth capacity of Microsoft's enterprise software business have also improved, so it can command a higher valuation.

Other institutions have also recently maintained positive views on Microsoft's AI monetization prospects. Stifel previously upgraded Microsoft from "Hold" to "Buy" and raised its price target to $575, mainly citing AI growth opportunities from Azure and Copilot.

Therefore, the core judgment behind Piper Sandler's price target increase can be summarized as follows: Microsoft is gradually upgrading M365 from traditional "selling software by seat" to a dual monetization model of "higher-tier subscriptions plus AI usage-based charging"; if enterprise usage of Copilot and Cowork continues to increase, AI revenue growth could be faster than the market previously expected.