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Microsoft’s (NASDAQ:MSFT) OpenAI Involvement May be the Tip of the Iceberg
Stock Analysis & Ideas

Microsoft’s (NASDAQ:MSFT) OpenAI Involvement May be the Tip of the Iceberg

Story Highlights

OpenAI’s latest projects are tough to pass up on, as they take the world and social media by storm. Tech kingpin Microsoft, the firm standing behind OpenAI, could have the most to gain from OpenAI’s continued advancement.

In a prior piece, I highlighted a few AI-leveraging tech stocks (spoiler alert: they’re two well-known FAANG names) that investors may have wanted to consider amid the recent surge in interest surrounding OpenAI’s recent software. OpenAI’s OpenGPT Chat and Dall-E are just two intriguing projects that have gone viral of late. One of the tech titans I didn’t mention in my prior piece is Microsoft (NASDAQ:MSFT), which is now involved in OpenAI.

It’s mind-blowing to have a work of art or sophisticated response with just a few words of text. Indeed, AI technology has advanced by leaps and bounds. The popularity of OpenAI’s projects may be an early sign of what to expect in the latter part of the decade.

As impressive as OpenAI’s projects are in their current state, it’s clear they’re not yet refined enough to put search engines out of business. In a couple of years, though, anything is possible.

It’s tough to ignore the splash that such OpenAI software has made in recent months, even as this market continues to shun tech stocks. That’s the disruptive power of AI. It doesn’t care what direction interest rates are headed. As it’s unleashed on the world, the disruptive capabilities could have the potential to be unfathomable.

Microsoft: The Tech Behemoth Standing Behind OpenAI

The enterprise (and video-gaming) software giant we all know and love has a $1 billion stake in OpenAI alongside a multi-year partnership that could be renewed down the road.

As OpenAI’s projects become more sophisticated, Microsoft may be in a great spot to increase its stake. Integrating OpenAI’s next-generation AI alongside Bing (Microsoft’s search engine), Azure, and even Xbox Gaming could help propel Microsoft to the forefront of innovative tech once again.

Indeed, the aging tech company just keeps finding ways to reinvent itself.

Even if OpenAI hits a few regulatory hurdles or roadblocks along the way, there’s not much for Microsoft to lose. Its investment is a mere drop in the bucket compared to its other businesses. Still, such a small moonshot-like investment could have sizeable returns.

In a way, I believe that Microsoft’s budding relationship with OpenAI could transform the company over the next decade and beyond.

You don’t need a market analysis to see the potential behind OpenAI’s latest projects. OpenGPT and Dall-E have taken the world by storm, and these projects are likely still in their infancy. Though the potential behind the two AI-powered viral hits is difficult to fathom, OpenAI sees its OpenGPT project hitting the $1 billion revenue milestone by 2024. Undoubtedly, 2023 could be a big year for the AI chat program.

If OpenAI hits (or exceeds) such a target, Microsoft will have a front-row seat to the next big thing. The implications on MSFT stock could have the potential to be sizeable, as OpenAI looks to help Microsoft’s divisions outpace that of the competition.

Looking to the public cloud, the tech titans are flexing their muscles. Microsoft’s Azure is trailing Amazon (NASDAQ:AMZN) Web Services (AWS) in the race for cloud supremacy. With AI thrown into the mix, Azure could easily leapfrog AWS, and we’ll go from the cloud wars to the AI wars. Expect big tech (think MATANA or FAANG stocks) to be significant players in the rise of AI.

Is Microsoft Stock a Buy, According to Analysts?

Turning to Wall Street, MSFT stock comes in as a Strong Buy. Out of 28 analyst ratings, there are 25 Buys and three Hold recommendations.

The average Microsoft price target is $291.10, implying an upside of 20%. Analyst price targets range from a low of $234.00 per share to a high of $371.00 per share.

Takeaway: Microsoft’s OpenAI Involvement May Just be the Start

Microsoft may be a $1.8 trillion behemoth, but it’s not about to slow down with its growth rate. Further, it seems to be out-innovating small-tech unicorns and many of its big-tech peers.

At 25.9 times trailing earnings, Microsoft stock is moving into 2023 with a lot of pressure on its back. Though there isn’t as much visibility as to what Microsoft’s OpenAI investment will translate to in the distant future, I think the current multiple attached to shares is too low.

If anything, the multiple heavily discounts the company’s innovative capabilities. While Microsoft’s peers may have similar AI projects, one can’t help but notice Microsoft’s ability to take risks on potentially disruptive technologies.

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