Microsoft's $10 Billion Bet on OpenAI Is Now Up in the Air. Here's Why That's Great News for the Stock.

Back in January, Microsoft (MSFT -1.16%) rocked the technology industry when it announced a $10 billion investment into leading artificial intelligence (AI) start-up OpenAI. It wasn’t the first time Microsoft backed the venture, having first injected $1 billion in 2019. Its total investment in OpenAI is rumored to be around $13 billion.

The heart of any early-stage company is the team of founders. In this case, there were 12 people involved in forming OpenAI in 2015, and one of them was Tesla chief Elon Musk. But none have been more instrumental to the organization than Sam Altman, who served as its CEO from 2019 until last Friday when he was fired by OpenAI’s board of directors.

His removal is proving extremely unpopular with OpenAI’s investors, its customers, and especially its employees, most of whom are now threatening to quit. What OpenAI’s turmoil means for Microsoft’s multi-billion-dollar investment is still unclear, but here’s why OpenAI’s implosion could actually propel the tech giant to the top of the AI industry.

Image source: Getty Images.

OpenAI has become mission-critical for Microsoft

Microsoft’s investments into OpenAI over the last few years helped the start-up develop its large language models, which power its popular generative AI application ChatGPT. It’s capable of instantly answering almost any question, in addition to creating unique digital images, creating original videos based only on user-prompted criteria, and even producing computer code.

In return for its billions of dollars in funding, OpenAI allowed Microsoft to integrate ChatGPT into its portfolio of products. The chatbot is now available through the Bing search engine, the Edge internet browser, the Windows operating system, and even the 365 document suite, which includes Word, PowerPoint, and Excel.

But Microsoft also offers OpenAI’s latest GPT-4 technology on its Azure cloud platform, where 18,000 business customers are already using it to develop their own AI applications. Since Azure is the fastest-growing segment of Microsoft’s overall business, expanding its presence in AI will be critical going forward — especially as competitors like Amazon Web Services are also ramping up their AI efforts.

However, Microsoft’s heavy reliance on OpenAI means it will need the start-up to continue improving its models in order to maintain the tech giant’s edge in the competitive cloud race.

OpenAI appears to be imploding

OpenAI was originally founded as a not-for-profit. In the very early days, it hoped to secure $1 billion in donations to fund its research into AI, but after only attracting $130 million, management realized it had to make a change.

That’s why OpenAI launched a for-profit subsidiary in 2019. It coincided with Sam Altman’s appointment as CEO, and Microsoft’s first $1 billion investment. The board of directors of the nonprofit, however, maintained governance over the for-profit arm of the business.

We don’t know exactly what happened, but reports suggest a conflict between OpenAI’s mission to develop AI for the benefit of humanity and Altman’s for-profit vision for the business led to his removal over the weekend. The four OpenAI board members who made the decision said via a company statement that Altman was not consistently candid with his communications.

It could mean a number of things, but it’s possible Altman was making key operational decisions without keeping the board fully informed.

In any case, chaos has since ensued. More than 700 of OpenAI’s 770 employees have threatened to quit unless Altman is reinstated, and investors in the start-up are considering a lawsuit against its board of directors. It’s unlikely Altman will return to OpenAI unless the board is replaced.

Microsoft swoops in

Late Sunday night, Microsoft CEO Satya Nadella announced Sam Altman — along with former OpenAI president Greg Brockman, who was also ousted — would be joining the tech giant to lead a new advanced AI research division. Basically, Microsoft has acquired the two brightest minds behind OpenAI to supercharge its internal development efforts, almost nullifying any loss of progress it might incur if the start-up does fail.

Even better, Microsoft hasn’t actually spent all of the $10 billion it agreed to invest in OpenAI back in January. The specific details are private, but it’s a multiyear deal, with the funds to be paid in tranches, and some of the funding involves non-cash benefits like cloud compute credits.

It’s possible recent events might even leave the agreement in tatters, especially if OpenAI’s entire workforce walks out the door. There is already speculation that many of those employees could find a home at Microsoft alongside Altman.

Nadella recently said he’s looking forward to getting to know OpenAI’s new CEO, Emmett Shear, who co-founded live-streaming platform Twitch, which was acquired by Amazon. However, now that Microsoft has begun to absorb OpenAI’s top talent, its dependence on the start-up is likely to erode.

What all this might mean for Microsoft stock

Investors initially sent Microsoft stock lower in after-hours trading on Friday following the news of Altman’s firing. But the losses reversed after hearing Altman was joining Microsoft, and the stock ended more than 2% higher on Monday.

While Microsoft reportedly owns 49% of OpenAI, it’s clear the tech giant has zero operational control over the start-up. Plus, given the mounting concerns about AI in Washington, regulators would almost certainly never allow Microsoft to acquire OpenAI outright.

However, with Altman now in-house, Microsoft can take a more pragmatic and commercial approach to AI development than OpenAI, which was bound by a moral-centric mission of providing open-source AI software. Microsoft’s $2.8 trillion market capitalization suggests it won’t be short of resources to help Altman and his team build the company’s new AI division.

Over the long term, reducing its dependence on a third party like OpenAI will be a net positive for investors, and I’d expect Microsoft stock to move higher in the years to come.

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