24/7 Insights

• Microsoft Corp. (NASDAQ: MSFT) looked like an early leader in the artificial intelligence (AI) space.
• Yet, shareholders may not benefit from it for years.

Microsoft Corp. (NASDAQ: MSFT) was supposed to be the big, successful winner as stocks rode the wave of artificial intelligence (AI). In January 2023, it invested in AI market leader OpenAI. The alliance became a tighter one when Microsoft said it would integrate OpenAI products into its cloud Azure platform in November of last year. Shortly after, OpenAI was valued at $80 billion in February, making the deal a financial coup. However, despite these successes, Microsoft’s stock has slightly lagged the Nasdaq. The index is up 24% while Microsoft is 21% higher over the past year.

Why the Delay?

Several things in the past year and a half could undermine a rise in its shares. First, it is now clear that AI will not bring large companies easy returns. Goldman Sachs described what it thinks will be a $1 trillion investment in generative AI as a long-term play that will not pay off for years. Companies like Microsoft that “got in early” seem to face earnings that will not show AI success for several quarters.

The New York Times recently wrote about Microsoft CEO Satya Nadella’s decisions regarding AI:

Risky bets on A.I. have become a habit for Mr. Nadella. Over the past five years, he has committed to investing $13 billion in another aggressive young company called OpenAI, even though it hadn’t yet made much money. And he told all of his lieutenants to find ways to build A.I. into Microsoft’s many, many products, even though the technology didn’t always work correctly.

Whether AI will be profitable for Microsoft is one of three major questions about investment decisions. After the company’s expensive choices, the question is whether its market share can stay well ahead of many start-ups that have raised billions of dollars. Perhaps more important is whether AI products from major rivals Alphabet, Amazon, and Oracle will take significant market share. In other words, the market could end up fractured.

Finally, and perhaps more critical over the long term, is the regulators’ view of whether Microsoft has started to corner the AI market. Earlier this month, Microsoft dropped a much-prized position as a board observer at OpenAI. EU regulators had threatened investigations several months ago. These regulators said they were “looking into some of the agreements that have been concluded between large digital market players and generative AI developers and providers.” They explicitly mentioned Microsoft’s deal with OpenAI.

What looked like a plan for Microsoft to lead the AI software industry has turned into a complex set of partnerships that may only pay off after years.

Be sure to grab a copy of our “The Next NVIDIA” report for other great AI stock ideas.

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