After the unexpected overnight success and recognition of ChatGPT, an advanced language model developed by OpenAI, Microsoft Corp (NASDAQ:MSFT) has decided to invest an additional USD 10 billion into the company.
Putting aside the hype, this is not the first time Microsoft has invested in OpenAI. In fact, the latest multiyear, multibillion-dollar investment will be the 3rd time that Microsoft is increasing its investments into OpenAI.
With the AI War heating up, Microsoft, a rather boomer-like stock, suddenly enters the crossfires for hypergrowth investors and even value growth investors.
So, is Microsoft Corp a BUY after its latest OpenAI investment?
Understanding Microsoft
Microsoft’s business has gone through a few iterations since its founding. Its first business was developing the desktop operating systems (OS) that eventually powered most of the first generation of consumer computers.
The company then introduced the Microsoft Office suite in 1990, before eventually becoming a multi-faceted technology gargantuan.
Today, Microsoft categorizes its business, services, and offerings into 3 categories, namely Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. All 3 categories are considered vital as they all account for roughly a third of Microsoft’s total revenue.
Under Productivity and Business Processes, Microsoft’s offerings include its Office Commercial and Consumer services. This also includes Microsoft 365 and its enterprise resource planning (ERP) system, Microsoft Dynamics. Its social media platform for professionals – LinkedIn is also categorized under this vertical.
In its Intelligent Cloud vertical, Microsoft parks its revenue derived from its server products and cloud services, which encompasses Azure, Enterprise Mobility, and Enterprise Services.
Under More Personal Computing, Microsoft’s revenue from Windows, Gaming (Xbox-related), Devices, and search & news advertising makes up the bulk of this vertical.
For the past 9 years, all 3 verticals have been exhibiting good growth trajectories, with Intelligent Cloud and More Personal Computing experiencing the greatest growth spurt.
Microsoft’s Latest Financials
Microsoft’s latest Q2’23 showed some resilient results amidst the uncertain and hawkish climate. Overall revenue inched up 2% and 7% under constant currency. Gross margin grew by 1% and 8% on constant currency.
However, higher general and administrative costs have drawn down its operating income to USD 20.4 billion. Thus, net income also dropped by 12% and diluted earnings per share (EPS) reduced in tandem as well.
Although collectively Microsoft did post a set of solid results, there are some chinks in its personal computing vertical.
Total revenue decreased 19% (down 16% CC) due to declines in Windows, Devices, and Gaming. Worst still, Microsoft’s guidance for the revenue of this segment in Q3’23 will be USD 11.9 to USD 12.3 billion, which is lesser than the USD 14.2 billion it achieved in Q2’23.
As for its cash flow, cash flow from operations was USD 11.2 billion, down 23 percent year-over-year as strong cloud billings and collections were more than offset by a tax payment related to the TCJA capitalization of R&D provision as well as higher employee and supplier payments. Free cash flow was USD 4.9 billion, down 43 percent year-over-year. Excluding the impact of this tax payment, cash flow from operations declined by 7 percent and free cash flow declined by 16 percent.
Understanding OpenAI
Since most of us were introduced to OpenAI via ChatGPT, it only seems befitting to test ChatGPT’s prowess in describing its founding company. As regurgitated, OpenAI is an Artificial Intelligence (AI) research company primarily focusing on language models and digital image generation from text deep learning.
And yes it does multilanguage as well.
DALL∙E, OpenAI’s deep learning model to generate digital images from natural languages, is also another key example of how far AI has progressed.
Since OpenAI is not a listed company, nor does it share its financials, there is no possible way to gauge the profitability and financial metrics of the company.
The Potential Synergy of OpenAI and Microsoft
To understand how OpenAI’s technology can play a part in enhancing Microsoft’s current suite of products or developing new products, we can take a closer look at Microsoft’s quarterly highlights, product releases, and enhancements.
One of the new consumer tools rolled out is Microsoft Designer, a graphic design app in Microsoft 365. Microsoft Designer is powered by AI technology, including DALL∙E 2 by OpenAI. DALL∙E 2 will be helping creators churn and create designs and images with minimal effort.
Microsoft Create, a website much like Canva, will also be a new initiative by Microsoft to help creators create better visual content. Coupled with an enhanced Image Creator from Microsoft Bing, which also utilizes DALL∙E 2, stunning AI-generated images can be pieced and further edited into a royalty and rights-free product.
Lastly, ChatGPT will slowly be rolling out on Azure OpenAI Service and on Bing, Microsoft’s search engine. Azure will no longer be just a cloud platform and service. It will be powered by the enhanced AI architecture supported by OpenAI’s AI models.
The rollout of ChatGPT on Bing could be as early as the next few days, as Microsoft just confirmed an exclusive event.
Is Microsoft a BUY?
I’ll be honest with you.
In my personal opinion, Microsoft is a BUY even without its investments in OpenAI. It is by far the most diversified tech company that does not rely heavily on advertising as its core revenue.
Microsoft’s approach has always been multi-pronged – to create great products that people love. From the OS that powers most of the world’s computers, to launching its flagship Office products and pivoting into a cloud company, Microsoft is looking more like Apple Inc. (NASDAQ: AAPL) than Alphabet Inc. (NASDAQ: GOOGL).
It is also slowly building its walled garden, which includes its range of Surface products. Coupled with its cloud and office products, Microsoft’s offerings will be as exhaustive as they can get.
However, do note that it’s a long-term game plan should you choose to invest in Microsoft. The AI catalyst will not be smooth sailing, and the success of OpenAI will definitely ruffle the feathers of other rival tech companies.
But putting that aside, my excitement for Microsoft’s prospects has gone up a notch!