The world experienced terrible disruption in 2022 from inflation and Federal Reserve interest rate hikes, a terrible year for the stock market, global political turmoil, the war in Europe, and humanitarian crises. But 2022 was also the year millions of people were introduced to the advanced capabilities of artificial intelligence (AI) via the controversial apps DALL-E 2 and ChatGPT. At least one tech giant is on board. Microsoft (MSFT 0.60%) is reportedly in talks to invest $10 billion in DALL-E 2 and ChatGPT's parent company, OpenAI.
If you've been wondering (or even asked ChatGPT) how you might be able to invest in these AI apps, the answer could wind up being Microsoft. But $10 billion isn't exactly chump change. Here's what Microsoft shareholders need to know.
NASDAQ: MSFT
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Microsoft is already at the party
If you're a Microsoft shareholder, you apparently already have a stake in DALL-E 2 and ChatGPT. Microsoft reportedly led a $1 billion funding investment round into OpenAI back in 2019, striking a deal to give the start-up more cash to continue developing its AI algorithms, as well as a partnership in which OpenAI would use Microsoft's Azure cloud computing platform.
OpenAI was founded at the end of 2015 by Sam Altman and Elon Musk, along with others, with the goal of ensuring AI "benefits all of humanity." Musk left the company in 2018, and Altman is now the CEO.
With close ties to Microsoft already, it isn't a surprise that the sudden popularity of DALL-E 2 and ChatGPT would lead the software titan to deepen the relationship. Microsoft CEO Satya Nadella has been talking about how cloud computing (data and applications housed in a remote data center and accessed by users via the internet) can help organizations "do more with less." Used the right way, AI could most certainly help Microsoft continue to deliver on that promise to its customers.
But $10 billion is a hefty price tag, even for Microsoft, at this particular time. At the end of September 2022, the company reported having $107 billion in cash and short-term investments on its books, offset by debt of $48.6 billion. However, bear in mind that Microsoft is also in the midst of acquiring Activision Blizzard for $68.7 billion in cash -- a deal that is undergoing regulatory scrutiny. Nevertheless, assuming the video game developer is taken over, and an OpenAI investment is made, Microsoft won't exactly be cash-rich anymore.
A fun fad, but can it make money?
DALL-E 2 and ChatGPT have been delighting users with computer-generated paintings and temperamental conversation, but it's unsurprisingly received lots of criticism, too. Artists worry about not just the ease in which text-to-image AI can crank out art, but also where the material came from to train it (it came from the artists). And ChatGPT, despite the disclaimers that it can sometimes provide spurious or incomplete answers, is being used to do things like cheat on student exams.
Besides moral issues, there's also the money problem. Like many tech start-ups, OpenAI is reportedly losing it, not making more of it. DALL-E 2 images can be purchased for just a few cents each, which is a start. But Altman said on Twitter that ChatGPT costs a few cents per chat in computing costs (it's currently free to use).
Microsoft might have a plan to monetize OpenAI's work, though. Besides the $10 billion investment, the rumor mill also contends Microsoft might try to embed ChatGPT's capabilities into its internet search afterthought, Bing. Bing, like Alphabet's Google Search, is primarily monetized with ads. So Microsoft clearly hopes ChatGPT in internet search form would grab more eyeballs, which increases the value of advertising.
Tools like DALL-E 2 and ChatGPT could also be added to Microsoft's current suite of software used by individuals and enterprise customers. Uses are only limited by imagination. Adding an AI assistant to further speed up work (like composing documents and emails, adding customized art to a PowerPoint presentation, or even writing software code) could help Microsoft add more users and raise prices for services.
As part of its $10 billion investment, Microsoft is reportedly working out a deal where 75% of OpenAI's profit would accrue to itself until its cash infusion is paid back. However, actual details on this profit-sharing agreement are scant at this point.
Is Microsoft stock a buy?
To be sure, there are plenty of question marks surrounding OpenAI and the merits of Microsoft investing in it. But Nadella has done a wonderful job in the cloud era in keeping Microsoft relevant amid a slew of software and enterprise computing upstarts. I'm inclined to believe any deal struck with OpenAI will be a benefit to Microsoft.
Granted, with economic storm clouds gathering at the start of 2023, Microsoft has been reporting slowing growth (revenue was up just 10.5% in the last reported quarter). That's to be expected, especially if a recession does strike this year as many investors fear it will. But Microsoft's expansion is far from tapped out, and it remains highly profitable.
Down well over 30% from all-time highs, Microsoft stock currently trades for 24 times trailing-12-month earnings and 26 times trailing-12-month free cash flow. So if you believe the software giant can continue growing its profits by at least a high-single-digit percentage over the next decade and beyond, shares look like a fair value for investors with a long-term mindset.
