by When OpenAI descended into boardroom-battle-chaos just before Thanksgiving, Microsoft (MSFT) was right in the crosshairs.
The software giant has already cast its lot with OpenAI, safely and at first to great acclaim. Microsoft first invested $1 billion in OpenAI in 2019, then upped the ante in January by another $10 billion. In total, Microsoft’s investment in OpenAI is reportedly worth up to $13 billion, albeit in mysterious and imprecise terms.
The firing of OpenAI’s CEO, Sam Altman, highlighted a significant reality – that Microsoft’s near and long-term fate in the AI arms race rests entirely with OpenAI.
In part, there’s a simple reason for that – Microsoft doesn’t have a bona fide exit strategy. Its OpenAI investment reportedly includes limited cash, and lots of Azure cloud credits.
Additionally, Microsoft is reportedly not involved with OpenAI, in the traditional sense. Instead, the software company is entitled to about half of OpenAI’s financial returns until a portion of the investment is repaid.
But more importantly, OpenAI is at the heart of Microsoft’s plan, in a race where competitors are taking advantage.
“If Microsoft’s relationship with OpenAI was severed or if OpenAI went away, it would set them back,” said DA Davidson analyst Gil Luria. “The rate of progress on this technology, and the rate at which they are changing their business around that technology is such that they don’t want to deal with any disruption.”
The new path to the tech kingdom is through artificial intelligence, and for Microsoft, OpenAI is the key.
While investors punished rivals Google ( GOOG , GOOGL ) and Amazon ( AMZN ) when they reported lackluster cloud numbers in October — despite beating earnings estimates overall — Microsoft earned awards for anticipating more than their cloud unit. Its shares opened nearly 5% higher on Oct. 25, the day after its after-hours earnings were reported.
Microsoft stock is up 57% this year, outpacing the S&P 500’s 25% gain. It currently trades at about 33x forward earnings, according to Yahoo Finance data, compared to 20x for Google.
“They are seen as an innovator in the hottest field in technology, and the stock price has reflected that this year,” Steve Sosnick, chief strategist at Interactive Brokers, told Yahoo Finance. “But in the long term, we are still far from knowing who the winner is.”
Maintaining that high valuation would require continued advancements in Microsoft’s AI offerings and cloud earnings. It launched its Copilot portfolio, a suite of AI assistants powered by GPT-4 OpenAI, in November.
Subscriptions to the AI bots could add $9.1 billion in sales by fiscal year 2026, Fred Havemeyer, Macquarie’s Head of AI & Software Research, told Yahoo Finance Live.
“What OpenAI did was help them finally become relevant in search, even after years of running,” Sosnick said. “
But the competition for AI products is fierce. Google launched Duet AI for Google Workspace in late August, and Amazon Web Services (AWS) introduced its enterprise AI chatbot, Amazon Q, in late November.
Where competitors like AWS are offering AI generation platforms compatible with multiple large language models (LLMs) from Anthropic, Cohere, Meta, and more, Microsoft has bet on OpenAI.
The OpenAI crisis was therefore necessary to resolve for the foreseeable future. So far, CEO Satya Nadella has passed the mark.
“Nadella is a chess master,” Luria said. “This will be a chapter in the authorized biography of Satya Nadella … He continues to do all this with humility. He does not have the pomp and arrogance that you see from many other technology leaders.”
Tola Capital partner Sheila Gulati, a former Microsoft executive who worked with Nadella for many years, credits Nadella’s leadership style with successfully navigating the OpenAI drama.
“His style is that you get along with the rest of the team, work together, be consultative, and helpful, and I’m going to listen – and listen deeply,” Gulati said. “He wants to get the best out of you, and then he’s decisive.”
Accepting a hard back from OpenAI now would be fraught with challenges. The innovative solution that Nadella came up with — hiring Altman and OpenAI President Greg Brockman directly — was not without complications.
“Microsoft could hire everyone… [but] to build something new, which is still difficult,” said Luria.
Ultimately, Microsoft chose OpenAI for its top dog status, but it may have to diversify sooner rather than later, especially if competitors emerge.
“Right now, they have their star struck with the leader, and that’s to their advantage,” Sosnick said. “The question now is whether OpenAI can maintain that status… they made a huge investment in an unconventional organization and that carries risk.”
Lingering anxiety
Going forward, concerns about OpenAI will be front and center for shareholders. For one, like many big-name AI startups, there is fear of a bubble and valuation.
“I think there is an awareness that there is a bubble, and that could lead to fear or encourage investors to expand the bubble further,” said PitchBook analyst Brendan Burke.
Traditional valuation metrics have flown out the window. Before the boardroom drama, OpenAI was reportedly seeking an $86 billion valuation, after receiving a $29 billion valuation in April.
A source told Yahoo Finance that OpenAI shares were among the most popular on the secondary market before the boardroom drama. When Altman’s departure was first announced, transaction volume plummeted.
That kind of sharp decline is just something the source has seen in cases where there is no change, such as FTX and WeWork.
While OpenAI’s value has recovered — the source said secondary transactions now give the company an implied valuation of $100 billion — buyer interest is only about half as much as in early November. Some of the demand has been built up in other AI startups such as Anthropic and Cohere; Microsoft has not made its platform compatible with its LLMs.
But OpenAI’s stars and assets are now a problem for Microsoft.
The two companies are linked in a union that strangely resembles a couple having a shotgun wedding. They study each other after the honeymoon, and are stuck, semi-literally, for richer and poorer, and in sickness and in health.
“There are natural limits to growth in a company as big as Microsoft, so if finding growth requires doing things in an unusual way, they should do that,” Sosnick said.
“But the risk, in the end, is the same with any innovator in any technology – competitors can sneak up on you by doing it better… Yes, diversification can help, but if you’re in partnering with five as well, that doesn’t help you either,” Sosnick said.
Allie Garfinkle is a Senior Technical Reporter at Yahoo Finance. Follow her on X, formerly known as Twitter, at @agarfinks and on LinkedIn.
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