Microsoft's AI dominance is further validated. Morgan Stanley's Q2 CIO survey: Azure demand remains rock solid, and Copilot deployment is expected to accelerate

According to the Zhitong Finance APP, Morgan Stanley recently released a research report indicating that based on its survey of Chief Information Officers (CIOs) in the second quarter of 2025, the recent demand trend for Microsoft (MSFT.US) remains relatively stable, with CIO sentiment largely unchanged compared to the previous quarter. Microsoft maintains a solid leading position in the field of generative artificial intelligence. Notably, CIOs expect to deploy M365 Copilot on 31% of endpoints within the next 12 months, up from 17% in the fourth quarter, indicating an increasing adoption rate.

Microsoft is well-positioned in the highly attractive AI opportunities and remains a key winner in the generative AI space. The survey shows that CIOs' spending intentions are quite stable, with little change quarter-on-quarter. CIOs now expect a 3.6% year-on-year growth rate in IT budgets for 2025, down 10 basis points compared to the first quarter; the expected growth rate for software spending in 2025 is also 3.6%, down 18 basis points from the first quarter.

However, Microsoft not only maintains a leading position in core spending intentions but also holds an advantage in generative AI spending plans. CIOs expect Microsoft's spending growth rate over the next year to reach 6.3%, slightly lower than the 6.5% observed in the bank's fourth-quarter 2024 survey. Nevertheless, Microsoft remains ahead, with 67% of CIOs expecting to increase net spending on Microsoft tools, reflecting the company's leading position in the AI field. The bank still believes that the sustainability of Azure growth and earnings per share growth is not fully recognized, as is the case with generative AI price-to-earnings ratios, thus maintaining an overweight rating.

Microsoft's Core Spending Intentions: 1) In the second quarter of 2025, Azure's spending intentions remain stable—among CIOs currently using or planning to use Azure, 57% expect to increase spending in the next 12 months, which is consistent with the high proportion of 60% of CIOs in the second quarter of 2024 who expected to increase Azure spending;

1. Office 365's spending intentions have slightly increased—55% of CIOs indicated intentions to increase spending in the next 12 months, compared to 47% in the second quarter of 2023 and 46% in the second quarter of 2024—meanwhile, in the long term, the shift towards E3/E5 package combinations is more favorable for Microsoft, indicating that users are continuously moving to higher subscription tiers, as 53% of CIOs using Office 365 expect to use E5 next year (the highest level of E5 adoption observed in the bank's dataset), up from the current 33% of CIOs using E5;

2. Over the next three years, spending intentions related to on-premises server products are expected to decline by 1.3%, which is actually better than typical historical feedback but lower than the 0.7% growth expectation in the second quarter of 2024 survey (the first time a positive growth expectation appeared in the bank's survey).

Microsoft's AI Spending Intentions: 1) The adoption rate of Microsoft's generative AI suite remains high, with 97% of CIOs expecting to utilize some form of Microsoft's AI tools within the next 12 months, which is the highest short-term adoption rate observed in the bank's survey since the question was first posed in the second quarter of 2023; 2) In terms of adoption scope, the Microsoft tools planned for use not only saw an overall increase but also for each product listed in the bank's survey (M365 Copilot, Azure OpenAI Service, GitHub Copilot, Security Copilot, Dynamics 365 Copilot, Microsoft Designer, and Viva Copilot);

1. Microsoft 365 Copilot is the most popular solution in Microsoft's growing suite of generative artificial intelligence products, consistent with observations from previous periods. Looking ahead, although a similar proportion of Chief Information Officers (CIOs) indicated that they expect to use some Microsoft AI tools in the next 12 months, the adoption expectations for this product suite have moderated in the medium term.

Notably, the usage rate of Microsoft 365 Copilot is expected to decline from 72% in the short term to 43% in the medium term, highlighting that the company still needs to prove the return on investment of this solution to drive sustained adoption, which may also indicate some dissatisfaction with M365 Copilot. Similarly, the usage rate of Azure OpenAI Service is expected to drop from 57% in the short term to 35% in the medium term, which may suggest intensified competition facing Azure AI services;

1. In terms of the penetration rate of M365 Copilot, CIOs expect to deploy M365 Copilot on 31% of endpoints in their organizations within the next 12 months, increasing to 43% over the next three years, up from the expectation of 17% to 38% in Q4 2024; 5) The adoption rate of Copilot beyond M365 Copilot has significantly increased—compared to previous surveys, the expected usage rates of GitHub Copilot, Security Copilot, Dynamics 365 Copilot, and Viva Copilot have all seen substantial growth