Microsoft, on the verge of reshaping its software business through a $10 billion investment

Autor: Article based upon analysis from Reuters Breakingviews | Link: Microsoft’s AI bet: heads I win, tails I also win
Timp de citit: 2 minute

Artificial intelligence is becoming more and more appealing to investors, who see this as a very lucrative outlet for years to come.

Through AI a better search engine – even more effective drugs – could be designed, while programs based on it could write more performant software.

One way to measure the huge relevance of this tech trend is Alphabet’s spending on research and development of such products.

The holding company of Google allocated $100 billion for this purpose over the past three years alone; according to Morgan Stanley this spending will grow by 13% annually in the next three years.

This alone may be reason enough for Microsoft to speed up its plans in this department, and so it did by planning a $10 billion investment in OpenAI.

The deal would be part of a funding round that would value the company that created the popular ChatGPT at $29 billion, according to Reuters.

OpenAI aims to grow sales to $1 billion next year, and that would value the firm at 29 times 2024 revenue.

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For Microsoft, the investment in the startup is chicken feed, since it has a market capitalization of $1.7 trillion and $107 billion of cash on hand.

So the giant is comfortable enough to make a bet on ChatGPT that could help boost its efforts in web search, a market dominated by Google.

Even if the deal flops, Microsoft will slow a rival that has a valuation of $1.1 trillion, and possibly regain much of the investment.

On the other hand, by locking up a promising firm, and scarce researchers, Microsoft may prevent Alphabet from winning, and may force it to raise spending.

Microsoft’s risk is further diluting since OpenAI already runs on its Azure cloud platform since 2019, when an agreement between the two was signed.

Also, Microsoft will reportedly get a 75% share of OpenAI’s profits until it makes back the money on its investment, after which the company would assume a 49% stake in OpenAI.