Microsoft's equity stake in OpenAI likely experienced dilution following the most recent funding round of the artificial intelligence company. This dilution comes amid expectations that OpenAI will contribute significantly to the growth of Microsoft's Azure platform, as indicated in a note from UBS Securities.
Earlier this month, OpenAI announced the closure of a substantial $6.6 billion funding round, achieving a post-money valuation of $157 billion. Thrive Capital led this financing round with a notable $1.25 billion investment, alongside existing backer Microsoft, as reported by UBS through various media outlets.
While specific figures regarding Microsoft's remaining stake in OpenAI are unclear, media analyses suggest that the tech titan's incremental participation in this funding round ranges from $750 million to $1 billion. UBS noted, "This could tell us something about the magnitude of investment that Microsoft aims to make in a critical technology partner," implicating that such actions might help reduce the risk of regulatory scrutiny surrounding the Microsoft-OpenAI relationship.
In recent quarters, Microsoft's financial outcomes have been notably affected by losses tied to equity investments, a trend conveniently pointed out by UBS. "While not naming OpenAI, it seems evident that Microsoft's stake in OpenAI and the consequent losses have an impact on earnings-per-share growth," the analysts stated.
A significant observation highlighted was that even for a giant like Microsoft, an annualized loss amounting to $2 billion—or approximately 2%—on pretax income can't be dismissed as immaterial. Looking ahead, OpenAI is projected to generate revenues of around $3.7 billion this fiscal year, expected to ascend to $11.6 billion in the subsequent year, and reach a staggering $26 billion by 2026, according to UBS's reports referencing outlets like the New York Times and The Information.
The brokerage also estimates that the Azure cloud-computing business will reap artificial intelligence-generated revenue of $7.65 billion this year. Analysts posited, "If Microsoft is on track to report $3 billion in OpenAI-related expenditure on Azure in 2024, then the contribution from OpenAI alone would account for about 40% of the Azure AI revenue." If OpenAI hits the projected revenue of $11.6 billion in 2025, analysts imply that Microsoft could recognize approximately $8.1 billion in Azure revenue directly linked to OpenAI's performance.
For next year, UBS projects a robust $14.8 billion in Azure AI revenue. Should these revenue forecasts for OpenAI hold true, analysts believe it would suggest a positive bias in Azure's revenue estimates. Recent media discussions have raised the possibility that Microsoft's exclusive agreement with OpenAI to serve as its cloud infrastructure provider for both training and inference may evolve.
UBS remarked that such a shift would not necessarily negatively impact Microsoft, as the capital expenditure required to solely support OpenAI might become significantly substantial. Notably, reports did not confirm Apple’s participation in OpenAI's recent funding round, which may temper investor expectations regarding a closer Apple-OpenAI alliance capable of enhancing Azure's inference demand, as stated by UBS analysts..