OpenAI and its almost “magical” ChatGPT (version 3.5) chatbot have taken the world by storm. The platform has high potential for growth and has already drawn in huge crowds, with some users describing it as AI’s “iPhone moment.” In this piece, we’ll look at why Microsoft (NASDAQ:MSFT) is a stock to watch closely as AI-savvy tech firms look to ride on the hype of ChatGPT and OpenAI.
Indeed, the technology marks a significant leap for user-facing AI, and though the shares of disruptive innovators are in a bit of a rut right now due to higher interest rates, it’s still hard, as an investor, to ignore the disruptive potential behind next-generation AI.
It’s difficult to imagine that ChatGPT is about to get much better as it moves closer to version 4.0. Indeed, many users have put the AI to the test, with remarkable and impressive results. While the chatbot has proven incredibly useful, it’s still far from perfect. The quality of its responses could be up for debate despite having an answer for nearly everything.
Undoubtedly, the current state of ChatGPT seems just a tad too overconfident in its abilities. Though coming iterations could make it humbler, wiser, and have better tracing capabilities to crack down on those who use ChatGPT responses as their own (yes, I’m referring to the many students who’ve used ChatGPT to write their high school essays!), questions linger as to what the endgame will be for OpenAI’s profoundly intriguing technology.
Indeed, it seems like the bot can do almost anything! It can write a hilarious memoir or poem in a particular style and do so in seconds.
As ChatGPT makes the leap from a fun, free tool to a challenger to Google’s search engine, it’s hard to imagine Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) standing pat as its top peer, Microsoft, increases the amount of skin it has in the conversational AI game. Alphabet’s DeepMind may very well be the response to ChatGPT, and it may be the Google to Microsoft’s Bing!
In any case, the launch of OpenAI and ChatGPT may have kicked off an AI war that could crown many new winners in the tech industry. I think the floodgates have opened in a big way.
Just because the total addressable market (TAM) of conservational AI (estimated to be worth over $32 billion by 2028, according to Brandessence Market Research) is massive doesn’t mean there won’t be AI firms beyond OpenAI or Microsoft that will be crowned winners from the rise of AI. At this juncture, though, Microsoft seems to offer investors the most reasonable entry point.
Microsoft: A Top AI Stock to Keep a Close Eye On
With Microsoft reportedly considering upping its stake in OpenAI to $10 billion, it certainly seems that Microsoft, the old firm that’s been relevant for decades, is about to become even more relevant as it looks to apply the power of AI to its broad range of applications. It’s not just Microsoft’s likely increased involvement and stake in projects such as OpenAI that should cause investors to keep closer tabs on the name. Microsoft has a massive ecosystem of indispensable products that could allow it to bring projects such as OpenGPT to prime time.
Undoubtedly, Microsoft Office has come such a long way since the days of the good, old paper clip assistant!
Looking further out, I’d look for Microsoft to leverage its strong network to bring out the best in AI technologies like ChatGPT.
With a paid version of the ChatGPT that could be in the works, we’ll get a better gauge of the type of reward to be had from the AI platform as it looks to monetize it. I think the potential rewards dwarf the risks, at least from Microsoft’s viewpoint.
Another $10 billion investment isn’t too big a deal for the enterprise tech behemoth as it would be for most of its smaller rivals that are experiencing the pinch of higher interest rates.
In a way, higher rates and greater investor discipline have created an environment where big tech will have an even bigger edge in the AI wars.
Is MSFT Stock a Buy, According to Analysts?
Turning to Wall Street, MSFT stock comes in as a Strong Buy. Out of 29 analyst ratings, there are 26 Buys, two Holds, and one Sell rating.
The average Microsoft price target is $283.58, implying upside potential of 18%. Analyst price targets range from a low of $212.00 per share to a high of $371.00 per share.
The Takeaway
I am bullish on Microsoft stock after its rough year that saw shares sink over 35% at their worst. The tech behemoth has a foot in the door of next-generation conversational AI, which has massive potential, but that’s not the only reason to own it. The firm is always looking for ways to reinvent itself to keep its long-term growth prospects going strong.
Further, the stock’s looking cheap at 25.75 times trailing earnings. That’s well below the software industry average of 47 times trailing earnings.
Sure, Microsoft is an older tech company, but I don’t think you can call it “boring” anymore, with the type of AI innovations that could be coming down the pipeline in the near future.
