Microsoft's Exit from Talks Threatens OpenAI's For-Profit Transition
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Notably, OpenAI needs to transform into a for-profit structure to access the funds from its most recent funding round, or investors could walk away. In the worst-case scenario, some may convert their equity funding into debt. For instance, one of its largest backers, Japan's SoftBank (SFTBY), might reduce its funding by $10 billion, from the initially planned $30 billion. Microsoft must approve the conversion by the end of this year.
Multibillion-Dollar Partnership at Risk
Microsoft has invested over $13 billion in OpenAI since its initial funding in 2019. The companies are negotiating the size of MSFT's equity stake, which could range from 20% to 49% in the restructured entity. However, the two seem to have reached an impasse regarding their future relationship. A Financial Times report stated that if the parties fail to reach an agreement, Microsoft could withdraw and continue to rely on its existing contract, which grants it access to OpenAI's technology until 2030.
Notably, the tech giant has exclusive rights to sell access to OpenAI's AI models and tools through Azure Cloud and receives a 20% share of OpenAI's revenues. Microsoft is unwilling to give up either benefit, as this exclusivity gives it an edge over rivals Alphabet (GOOGL) and Meta Platforms (META) in the AI race. Meanwhile, this fallout has led OpenAI to consider legal action, threatening to take Microsoft to court and accusing it of anticompetitive behavior.
Moreover, OpenAI is complaining that Microsoft is unable to deliver the enhanced computing power required to run and train its advanced ChatGPT models. The AI firm boasts 500 million weekly active users worldwide.
Their partnership has indeed been a productive one, delivering advanced AI tools to the masses and widely regarded as one of the most important in the technology sector. Both parties are said to be in daily discussions on the subject, and their recent joint statement reads, 'Talks are ongoing and we are optimistic we will continue to build together for years to come.'
Furthermore, once this hurdle is cleared, OpenAI must receive approval from attorneys general in Delaware and California to convert to a for-profit structure. Additionally, OpenAI must contend with billionaire Elon Musk 's lawsuit, which seeks to halt the transformation.
Is Microsoft a Good Stock to Buy?
Analysts remain highly optimistic about Microsoft's long-term stock trajectory. On TipRanks, MSFT stock has a Strong Buy consensus rating based on 31 Buys and five Hold ratings. The average Microsoft price target of $518.77 implies 8% upside potential from current levels. Year-to-date, MSFT stock has gained 14.4%.
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