Thanks to OpenAI, Microsoft Stock May Be Worth $410, Says Oppenheimer

With a market capitalization of $2.4 trillion, Microsoft Corporation (NASDAQ:MSFT) has grown to become the second most valuable company in the world.

So Microsoft is worth a lot of money. And it may be worth even more than you think.

In a recent research note, Oppenheimer analyst Timothy Horan laid out his argument for why Microsoft stock could be worth at least $100 billion more than it currently costs, if investors properly value the company’s 49% ownership stake in privately-held artificial intelligence company OpenAI.

How does Horan come to this conclusion? By using math.

Last week, tech website The Information reported that artificial intelligence start-up Anthropic, a competitor to OpenAI, is trying to raise $2 billion in new financing at a price that would value the entire company at $25 billion. According to The Information, this valuation would equate to approximately 250 times Anthropic’s current annual revenue of $100 million. And here’s the thing:

If a similar 250x valuation is applied to OpenAI’s reported $1 billion in annual revenue, well, that implies a valuation of $250 billion for OpenAI. It further implies that Microsoft’s 49% stake would be worth about half that amount — $125 billion (or $100 billion in Horan’s more rounded, conservative estimate).

In fact, Horan’s estimate may be even more conservative than the math suggests. As the analyst points out, Anthropic’s “Claude LLM” — its version of OpenAI’s ChatGPT — is arguably only the “second-best-performing” large language model AI out there at present. ChatGPT is the first, and logically, you’d expect investors to pay a premium for No. 1, over No. 2’s valuation — not a discount.

Now, there is an argument to the contrary — that Anthropic’s revenues should be valued more highly than ChatGPT’s. As Horan points out, Google has already invested $3 billion in Anthropic (taking a 10% stake in the company), while Amazon spent $1.25 billion to acquire a stake as well (and has an option to buy $4 billion more).

Zoom and Salesforce have also taken smaller stakes in Anthropic, says Horan. And if Anthropic’s latest funding round attracts yet another big-name tech company (or three) to its side, then that might arguably make Anthropic a more tech-agnostic AI vehicle for a wide variety of tech firms, making it easier for the company to make sales to these shareholder-companies, and working to isolate ChatGPT in its role as a near-subsidiary of Microsoft.

So yes, there are arguments both for and against giving OpenAI a valuation premium over Anthropic. Then again, that may be why Horan assigned a bit of a valuation discount to OpenAI in making his $100 billion guesstimate. The bigger point, though, is that the math suggests that OpenAI’s valuation is still really big any way you calculate it, and that this is an argument for valuing Microsoft more highly as well.

How high, precisely? Horan places a $410 price target on Microsoft stock — 28.5% above where Microsoft stock trades today. And it almost goes without saying that he believes you should buy the stock. Horan’s rating on Microsoft: Outperform. (To see Horan’s track record, click here)

Overall, the bulls are definitely running for MSFT, as the stock’s Strong Buy consensus rating shows – it is backed up by 30 Buy recommendations, and 4 Holds. The shares are trading for $327.32 and the $397.19 average price target suggests a one-year upside potential of ~21%. (See MSFT stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.