This picture taken on January 23, 2023 in Toulouse, southwestern France, shows screens displaying … [+]
Generative Artificial Intelligence (AI) — epitomized by ChatGPT — is the high tech story of 2023.
I’m curious whether Microsoft’s $13 billion investment in ChatGPT’s parent, OpenAI, would add meaningful value to the tech giant’s revenue.
This week I learned analysts estimate OpenAI will add between $30 billion and $40 billion to Microsoft’s top line.
But is that amount significant enough to propel Microsoft‘s stock — which is up 19% this year (more than the S&P 500’s 6.6%)?
I see two reasons why ChatGPT could add significantly to Microsoft’s revenues:
However — unless there is a future upside surprise — Microsoft’s stock price already reflects the financial lift from ChatGPT.
(I have no financial interest in the securities mentioned).
The generative AI market has accelerated since OpenAI introduced ChatGPT in November 2022. According to market researcher Market.US, Generative AI ended 2022 as a nearly $11 billion market and it’s expected to grow at a 31% compound average annual rate to $152 billion in 2032.
Generative AI will boost enterprise intelligence, and catalyze creativity and innovation. According an Accenture
Microsoft plans to incorporate ChatGPT into many of its products. According to CNBC, these include “its Bing search engine, sales and marketing software, GitHub coding tools, Microsoft 365 productivity bundle and Azure cloud.”
These plans cap a three year run for generative AI — technologies focused on producing automated text, visual and audio responses. While investor interest in most technology sectors has waned since the IPO market peaked in 2021, generative AI has remained scorching hot, noted CNBC.
In 2019, Microsoft invested $1 billion in OpenAI — which in November introduced ChatGPT, “a chatbot that went viral thanks to its ability to craft human-like replies to users’ queries about nearly any topic,” according to CNBC.
By March 2023, Microsoft’s investment in OpenAI had reached $13 billion — helping propel the startup’s valuation to around $29 billion. According to PitchBook data, OpenAI was forecast to grow its revenue 150% to $200 million in 2022 — and it expects to quintuple that figure to $1 billion in 2024.
Following a series of flops — Word’s Clippy assistant, Windows taskbar’s Cortana and Twitter chatbot Tay — ChatGPT has delivered a considerable edge for Microsoft in computers that train Generative AI. According to Bloomberg, Microsoft spent “several hundred million dollars to build a massive supercomputer — linking together thousands of Nvidia graphics processing units made — that trained ChatGPT.”
As Microsoft continues to build up its Azure cloud technology to handle more sophisticated Generative AI models, Microsoft rolled out a new version Bing in February that uses generative AI to “give direct answers to questions and had a sophisticated chat tool.”
Given that Bing is a mere 10% of the search engine market and accounted for 6% of Microsoft’s total revenue ($12 billion), this was far less important to investors than the March rollout of Chat GPT to Office 365, its main business, according to the Wall Street Journal.
Through Microsoft 365 Copilot, customers will be able to use natural language to create Word, PowerPoint, and Excel documents. As the Wall Street Journal reported:
I am skeptical that companies will be willing to pay for Copilot. As a user of all three applications, I do not see the value in what Copilot would do for them. Several large enterprise customers told UBS analyst Karl Keirstead they would be reluctant to pay for Copilot until it “is truly enterprise-grade and the ROI is proven,” according to the Wall Street Journal
Microsoft expects that development to take several years. As CEO Satya Nadella told the Wall Street Journal, “Just like when the mouse was first introduced and we had to learn, clicking and right-clicking, we will, perhaps two years from now, three years from now get very familiar with, ‘oh, yeah I know I’m dealing with a copilot, not an autopilot.’ ”
If the two analysts who forecast that ChatGPT would contribute between $30 billion and $40 billion to Microsoft’s revenue are correct, this would represent a 10% to 20% boost to the tech company’s 2022 revenue.
A March Credit Suisse report estimated ChatGPT could provide Microsoft an additional $40 billion in revenue and $2 in earnings per share over the next five or more years, according to Business Insider.
ChatGPT added 100 million users since its November 2022 launch. Its biggest contribution to Microsoft’s revenues would happen once it is incorporated into Office 365. Credit Suisse also sees Bing AI as “a productivity [enhancing], cost-cutting tool,” noted Business Insider.
Wells Fargo analyst Michael Turrin expects ChatGPT to add “over $30 billion in new annual revenue for Microsoft, with roughly half coming from Azure,” reported CNBC. Turrin could be on to something because in October 2022, Nadella said Microsoft’s Azure Machine Learning revenue had doubled for four quarters in a row.
In its most recent quarter ending in December, Microsoft reported very slow growth and gave a conservative outlook. Perhaps this slowing growth — which is way below how fast the company grew in 2022 — explains why Microsoft’s stock is trading slightly below analysts’ average 12 month price target.
Revenue gains were 2% to $52.75 billion while Microsoft’s cloud platform growth slowed to 35% in the quarter as customers became cautious due to fears of an economic slowdown. Sadly for investors, CFO Amy Hood said she expects cloud platform growth “to slow another four to five percentage points,” according to TechTarget.
Since that late January announcement, Microsoft stock rebounded due to enthusiasm about ChatGPT. However, absent new information about how and when Microsoft will monetize the chatbot, the 19% rise in its shares this year fully reflects the estimates of how much additional revenue ChatGPT technology will bring to Microsoft.
Assuming ChatGPT products will add $40 billion to 2028 revenue and Microsoft keeps growing from its other businesses at an 18% annual rate to $453 billion, ChatGPT would account for 9% of Microsoft’s 2028 revenue.
This could be an explanation for why Microsoft stock opened April 10 1% below the 12-month price target of $290 offered by 42 analysts, according to CNNBusiness.
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