Investors understand Microsoft's cloud-computing opportunities, but may not be giving enough credit to the revenue potential of its software business

Microsoft is increasing the value proposition of its software through AI add-ons.

Microsoft's software business may not be the first thing that comes to mind when investors think about its artificial-intelligence story, but it could be the "most underappreciated" aspect of the company's narrative going forward.

That's according to Jefferies analyst Brent Thill, who recently wrote of the potential for Microsoft 365 Cloud, the software giant's classic enterprise software suite that includes things like Word and Excel.

As the company continues to develop its AI tools, which can be bundled with its legacy M365 platform offerings, Microsoft (MSFT) has created pathways to tap new revenue streams, Thill believes. He thinks this part of the investment case is less understood than the Azure cloud-computing business, which analysts have frequently pointed to as a clear growth engine for Microsoft.

For one, Thill says Microsoft's offerings that integrate AI agents into the platform present an opportunity for long-term growth, because they increase the amount of money Microsoft can rake in from each of its users.

The growth opportunity is tied to the strategic pricing of Microsoft E7, the company's top-tier enterprise package, priced at $99 per user per month.

Many enterprises are already paying roughly $90 per user per month for a combination of M365 E5, a common M365 subscription plan, and Copilot, the company's AI-powered assistant.

Yet Thill argues that the company's newer E7 bundle, which has a broader suite of AI offerings that integrate more agents into existing workflows, is a "relatively modest step-up," and a trade-off worth making for companies.

He also notes that Cowork, which offers AI tools for work-specific tasks like scheduling meetings and managing calendars, serves as a large opportunity for additional "usage-based" revenue, on top of the company's existing business model based on per-user pricing.

In terms of timing, Thill says that one barrier for adoption of these AI offerings is that companies increasingly want to spend only up to the point where they see a clear return on investment.

"They want consumption tied to real business value, rather than burning [AI] credits on lower-value tasks such as summarizing Outlook," he explained.

While companies' growing discipline could slow consumption in the short term, the analyst believes offerings like Cowork will continue to raise the bar for Microsoft's revenue growth potential in the long term.

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Thill noted that the fact that Copilot has already gained "meaningful traction" within a relatively short period since its launch in 2023 gives him confidence that AI adoption will occur on a "faster timeline" compared to previous upgrades of the company's productivity suites.

-Hannah Pedone