While much of the media's attention has been squarely focused on Nvidia, longtime tech behemoth Microsoft (MSFT 2.44%) is an artificial intelligence (AI) force to be reckoned with as well. The company is a close partner of OpenAI, having invested billions of dollars in the creator of ChatGPT.
Aside from this direct investment, Microsoft's Azure Cloud is the favored provider for ChatGPT's computational needs. Generative AI models like ChatGPT require enormous amounts of computing power, the kind that few companies have the resources to provide. Microsoft is one of those companies.
Investors have generally favored the company over the last few years -- although not to the degree some of its peers have enjoyed -- in large part because of its relationship with OpenAI and Azure's success. So why did the head of one of the most successful hedge funds on Wall Street, Ken Griffin, sell nearly 70% of his stake this year?
NASDAQ: MSFT
Key Data Points
Citadel is making moves
First, let me note that although Griffin's fund, Citadel, sold shares in the first two quarters of 2024, it actually bought shares last quarter. However, its third-quarter purchase of roughly 20,000 shares is dwarfed by the combined 3 million shares Citadel let go in the first half of the year.
It's not just Microsoft, however. In Q3, Griffin sold about 90% of his Amazon and Apple stakes, 80% of his Bank of America shares, and 95% of his Walt Disney stakes. On the other hand, Griffin bought nearly 5 million shares of Nvidia and 7 million shares of Citigroup.
This is all to say that Ken Griffin runs an active fund, and it is not unusual for him to sell a large position only to reenter a few quarters later. It's not clear if he's lost faith in Microsoft in the longer term, or if he sees a more short-term opportunity. There are reasons to believe it could be the former, though.
Microsoft and OpenAI's relationship may be on rocky ground
OpenAI is unique, and not just because it's a pioneer in modern AI. It was founded as a non-profit, transitioned into something of both a for- and non-profit, and is now evolving into entirely for-profit. Microsoft invested its billions in the second of those stages, reaching an agreement where a cap was placed on how much return Microsoft could earn.
Now, OpenAI is inviting a new round of investment while removing the cap. Although Microsoft is a part of it, it is not "leading" the round -- lead investors usually receive the most favorable terms and enjoy the most influence. This has reportedly caused a rift in their relationship and could lead to legal woes in the future.
This is not great for Microsoft. Its "golden goose" may not really belong to it, at least not in the way many investors had hoped. How much independence OpenAI walks away with remains to be seen, but Microsoft seems to be hedging its bet, having hired talent from OpenAI's competitors to flesh out its AI program in-house.
Microsoft may come under regulatory fire
It was reported last week that the U.S. Federal Trade Commission (FTC) is preparing to launch an investigation into "anti-competitive practices" at Microsoft, specifically its Azure Cloud. The FTC is looking into allegations that Microsoft is making it difficult for customers to switch from Azure by imposing harsh and unfair terms.
This wouldn't be the first time the FTC investigated Microsoft, and the company is certainly not the only tech company currently drawing unwanted attention from the regulator. Still, keep your eyes peeled for more news here.
Microsoft is still a great company
While it would certainly be a blow to the company for it to lose its close relationship with OpenAI, I think Microsoft's continued success in AI is likely given the strength of Azure.
Microsoft isn't showing the kind of growth I'd like to see given the premium its stock is carrying -- it's currently trading at 35 times earnings -- but it's not outrageous for the tech sector. Ultimately, I think there are probably better opportunities in the market, but Microsoft can still be a solid part of a well-diversified portfolio.
