Microsoft's Copilot Paying Customer Disclosure Sparks Disappointment, But Contract Backlog and Azure Growth Anchor Thesis

What happened

Microsoft's recent earnings call revealed the number of paying Copilot customers for the first time, leading to investor disappointment as the figure fell short of expectations. However, the DeepValue report emphasizes that Microsoft's investment thesis is not reliant on Copilot alone, but on Azure's capacity-gated 39% YoY growth and a $625B commercial RPO providing 110% YoY forward visibility. Copilot, with 15M paid seats against over 450M Microsoft 365 commercial seats, serves as an incremental ARPU lever, with promotions and price cuts running until March 31, 2026, to drive adoption. Market sentiment has shifted to scrutinize AI capex payback and Copilot monetization pace, yet SEC filings indicate much GPU spend is already contracted, reducing stranded-capacity risk. Thus, while the Copilot numbers fuel short-term skepticism, the core thesis remains intact, hinging on Azure performance and margin stabilization over the next 3-6 months.

Implication

The low Copilot paying customer count highlights risks that AI monetization may be slower than anticipated, potentially delaying Microsoft 365 ARPU uplift and increasing reliance on promotions. However, Microsoft's $625B commercial RPO, heavily concentrated with OpenAI, provides a contractual revenue floor, supporting visibility even if Copilot adoption lags. Key near-term checkpoints include FY26 Q3 Azure growth sustaining ~37-38% CC and capex decreasing sequentially to mitigate FCF compression and margin pressure from AI investments. Post-March 31, 2026, Copilot demand must accelerate without discounts to validate durable willingness-to-pay; otherwise, it signals adoption friction that could undermine long-term AI economics. Overall, the implication is to maintain a balanced view: monitor Copilot for early warning signs, but anchor decisions on Azure's supply-gated growth and RPO conversion, as these are more critical to the thesis.

Thesis delta

The Copilot customer disclosure does not fundamentally shift the investment thesis, which remains centered on Azure's capacity-gated growth and commercial RPO conversion. However, it reinforces the need for vigilance on post-promotion Copilot adoption to ensure AI monetization scales without discount dependency, adding a layer of scrutiny to the bull case's assumption of 25M+ paid seats.