When OpenAI descended into boardroom-battle-chaos right before Thanksgiving, Microsoft (MSFT) was immediately in the crosshairs. The software giant had already thrown in its lot with OpenAI, incontrovertibly and initially to much fanfare. Microsoft first invested $1 billion in OpenAI in 2019, then upped the ante in January with another $10 billion.
In total, Microsoft’s investment in OpenAI is reportedly worth as much as $13 billion, albeit with mysterious and unorthodox terms.
The ousting of OpenAI CEO Sam Altman highlighted a salient reality — that Microsoft’s near- and long-term fate in the AI arms race lies squarely with OpenAI.
If Microsoft’s relationship with OpenAI was severed or OpenAI disappeared, then it would set them back. The rate of progress on this technology, and the rate at which they’re transforming their business around that technology is such that they don’t want to deal with any disruption.
Microsoft’s stock has rocketed up 57% this year, outpacing S&P 500’s 25% gain. It’s currently trading at around 33x forward earnings, according to Yahoo Finance data, compared to 20x for Google.
“They’ve been seen as an innovator in the hottest area in tech, and the stock price has shown that this year,” Steve Sosnick, chief strategist at Interactive Brokers, told Yahoo Finance. “But long-term, we’re still far from knowing who the winner is.”
Microsoft launched its Copilot portfolio, a series of AI assistants powered by OpenAI’s GPT-4, in November. If Bing with ChatGPT can eat into Google’s market share for search, on its own, the investment more than justifies itself.
There are lingering concerns about OpenAI. Traditional valuation metrics have flown out the window. Prior to the boardroom drama, OpenAI was reportedly seeking a $86 billion valuation, after fetching a $29 billion valuation in April. And the value of OpenAI has recovered — the source said secondary transactions now give the company an implied valuation of $100 billion — but the buyer interest is only about half as much as early November.
The two companies are linked in a union that’s oddly akin to a couple who had a shotgun wedding. They’re learning about each other in the aftermath of the honeymoon, and are stuck, semi-literally, for richer and for poorer, and in sickness and in health.