Generative artificial intelligence (AI) exploded in popularity lately, especially after the launch of Microsoft-backed (MSFT +0.25%) OpenAI's ChatGPT chatbot in November 2022. It became a sensation thanks to its ability to crack jokes, write poems and essays, and create articles based on user requests.
ChatGPT already received an estimated 672 million visits since its debut, according to website traffic analytics provider SimilarWeb. What's more, the chatbot reportedly controls 92% of total website traffic already, driven by a 36x increase in the number of visits since its launch. Not surprisingly, Microsoft and OpenAI are set to capitalize on this nascent opportunity that's expected to multiply big time in the long run. Let's see how.
Microsoft is on its way to tapping a multibillion-dollar space
ChatGPT's exploding popularity puts Microsoft in a solid position in the generative AI market that's expected to expand from just $10 billion in annual revenue in 2022 to over $200 billion in 2032, clocking a compound annual growth rate of over 34%. The good part is that Microsoft and OpenAI have already started making moves to monetize the ChatGPT chatbot.
NASDAQ: MSFT
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OpenAI recently launched a pilot subscription program for users in the U.S. starting at $20 a month, known as ChatGPT Plus. The paid subscription will give users better response times and early access to new features, along with access to the service even during peak traffic. The company says that the free tier will continue to be available to users, and it is also exploring lower-priced ChatGPT plans. Moreover, OpenAI is looking to target business users as well.
Microsoft will reportedly get 75% of OpenAI's profits following its $10 billion investment in the company until the former recovers that amount. After that, the tech giant will hold a 49% stake in the ChatGPT operator. So Microsoft has already set itself up to take advantage of this opportunity. It is worth noting that OpenAI is expected to turn a $200 million profit this year.
Though that figure is small right now, it could balloon substantially given that OpenAI is reportedly working on a smartphone app for its popular chatbot. Additionally, Microsoft equipped its Bing search engine and Edge search browser with OpenAI's algorithms to scale up its offerings. The company claims that Bing users will be able to perform complex search operations "such as for planning a detailed trip itinerary or researching what TV to buy" with its AI-powered search engine, apart from writing emails for users or even helping prepare for a job interview.
This could be a game changer for Microsoft because the company is a tiny player in the search engine market, with a share of just 9% at the end of last year. Alphabet (GOOG +2.42%) (GOOGL +2.83%) is the 800-pound gorilla, with a share of 84%.
All this indicates that Microsoft has a lot to gain from the potential growth in the adoption of generative AI applications such as chatbots. The integration of ChatGPT could help it gain more share in the massive search engine market, which could in turn lead to growth in revenue from digital advertisements. As Microsoft works on ways to integrate generative AI into more applications with the help of OpenAI, it would put itself in a healthier position to make the most of this potentially lucrative opportunity. So don't be surprised to see this tech stock explode in 2023 and beyond.
Alphabet may be down, but don't count it out just yet
Alphabet is playing catch-up with Microsoft right now, and things aren't going well for the search engine giant. Alphabet recently revealed its own AI chatbot -- Bard -- but the tech giant's stock fell big time after it gave a wrong answer to a question about the James Webb Space Telescope.
This sent the alarm bells ringing among Alphabet's investors given the big threat it faces from ChatGPT and its integration into Microsoft's Bing search engine. It looks like Alphabet may have hurriedly rolled out its chatbot in response to Microsoft, and the widely publicized mistake seems to have dented investors' confidence in the company's ability to compete in the generative AI space.
NASDAQ: GOOGL
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However, it would be wrong to write off Alphabet's prospects in the chatbot market that's still in its early phase of growth. Mordor Intelligence estimates that the chatbot market was worth an estimated $3.8 billion in 2021. It is estimated to clock 30% annual growth through 2027, so there is still time for Alphabet to get its act together.
Alphabet CEO Sundar Pichai explained how the company will go about integrating AI into its products on the latest earnings conference call, stating that investors are "going to see a lot from us in the coming few months" in multiple areas. Also, Alphabet is the leader in the search engine market, with an 80%-plus market share, so it has a big lead over Microsoft in this space.
This could be an advantage for Alphabet because the Bard chatbot can provide responses based on the wide gamut of information available on Google, while ChatGPT is programmed to respond based on the data that is fed into the chatbot. So, if we look beyond Bard's fumble, it isn't all doom and gloom for Alphabet's chatbot. It is also worth noting that the integration of AI tools could help advertisers improve targeting on Alphabet's platforms and drive stronger returns on investments.
If Alphabet gets its act together and starts making waves in the chatbot market as the year progresses, it won't be surprising to see the stock regain its mojo and soar higher. That's why now may be a good time to buy the shares since they are trading at 21 times trailing earnings, a discount to their five-year price-to-earnings ratio of 31 and the Nasdaq 100's earnings multiple of 24.
