by When OpenAI descended into the chaos of boardroom battles just before Thanksgiving, Microsoft (MSFT) was immediately in the crosshairs.
The software giant had already joined OpenAI, uncontroversially and initially with much fanfare. Microsoft first invested $1 billion in OpenAI in 2019, then upped the ante in January with another $10 billion. In total, Microsoft’s investment in OpenAI is reported to be worth up to $13 billion, albeit in mysterious and unorthodox terms.
The ouster of OpenAI CEO Sam Altman highlighted a salient reality: that Microsoft’s short- and long-term fate in the AI arms race rests squarely with OpenAI.
In part, there’s a simple reason for that: Microsoft doesn’t have a genuine exit strategy. Its investment in OpenAI reportedly includes limited cash and plenty of Azure cloud credits.
Additionally, Microsoft reportedly doesn’t actually own a stake in OpenAI, in the traditional sense. Instead, the software company is entitled to about half of OpenAI’s financial returns until a portion of the investment is repaid.
But most importantly, OpenAI is at the heart of Microsoft’s plan, in a race where competitors are gaining ground.
“If Microsoft’s relationship with OpenAI broke down or OpenAI disappeared, that would set them back,” said DA Davidson analyst Gil Luria. “The pace of progress of this technology and the pace at which they are transforming their businesses around that technology is such that they don’t want to deal with any disruption.”
The new path to the technological kingdom goes through artificial intelligence and, for Microsoft, OpenAI holds the key.
While rivals Google (GOOG, GOOGL) and Amazon (AMZN) were punished by investors when they reported lackluster cloud numbers in October – despite beating earnings estimates across the board – Microsoft earned praise for beating expectations with your cloud drive. Its shares opened nearly 5% higher on Oct. 25, the day after it reported after-hours earnings.
Microsoft shares have soared 57% this year, outpacing the S&P 500’s 25% rise. It currently trades at about 33 times forward earnings, according to Yahoo Finance data, compared with 20 times Google’s.
“They have been seen as innovators in the hottest area of technology, and the stock price has demonstrated that this year,” Steve Sosnick, chief strategist at Interactive Brokers, told Yahoo Finance. “But in the long term we are still far from knowing who the winner will be.”
Maintaining that lofty valuation would require continued advances in Microsoft’s AI offerings and cloud earnings. In November it launched its Copilot portfolio, a series of AI assistants powered by OpenAI’s GPT-4.
Subscriptions to AI robots could add $9.1 billion in sales by fiscal 2026, Macquarie head of software and AI research Fred Havemeyer told Yahoo Finance Live.
“What OpenAI did was help them finally become relevant in search, after years of not doing so,” Sosnick said. “If Bing with ChatGPT can eat into Google’s market share in search, single-handedly, the investment is more than justified.”
But competition for AI products is fierce. Google launched Duet AI for Google Workspace in late August and Amazon Web Services (AWS) introduced its AI enterprise chatbot, Amazon Q, in late November.
While rivals like AWS offer generative AI platforms supporting multiple large language models (LLMs) from Anthropic, Cohere, Meta, and more, Microsoft has bet the house on OpenAI.
That made resolving OpenAI’s crisis essential to its immediate future. So far, CEO Satya Nadella has surpassed the mark.
“Nadella is a chess master,” Luria said. “This will be a chapter in the authorized biography of Satya Nadella… He continues to do all of this with humility. There is never the pomp and arrogance that you see in many other tech leaders.”
Tola Capital partner Sheila Gulati, a former Microsoft executive who worked with Nadella for years, credits Nadella’s leadership style for successfully navigating the OpenAI drama.
“His style is to get along with the rest of the team, work together, be consultative and helpful, and I’m going to listen… and listen deeply,” Gulati said. “He wants to get the best out of you and then it’s decisive.”
Taking a hard left turn now on OpenAI would be fraught with challenges. Even the immediate solution Nadella came up with (hiring Altman and OpenAI president Greg Brockman directly) was not without complications.
“Microsoft could have hired everyone… [but] building something new is still difficult,” Luria said.
Ultimately, Microsoft chose OpenAI for its leader status, but it may need to diversify sooner rather than later, especially if competitors catch up.
“Now they have attached their star to the leader and that benefits them,” Sosnick said. “The question now is whether OpenAI can retain that status… They made a big investment in an unconventional organization and that comes with risks.”
Lingering concerns
Going forward, concerns about OpenAI will be front and center for shareholders. On the one hand, like many big-name AI startups, there are fears of bubbles and valuations.
“I think there is awareness that there is a bubble, and that can create fear or encourage investors to expand the bubble further,” said PitchBook analyst Brendan Burke.
Traditional valuation metrics have gone out the window. Before the boardroom drama, OpenAI was reportedly seeking a valuation of $86 billion, after landing a valuation of $29 billion in April.
A source told Yahoo Finance that OpenAI shares were among the most in-demand on the secondary market before the boardroom drama. Following the initial announcement of Altman’s departure, trading volume plummeted.
That kind of precipitous decline is something the source has only seen in comparatively unflattering situations, such as FTX and WeWork.
Although OpenAI’s value has recovered (the source said secondary transactions now give the company an implied valuation of $100 billion), buyer interest is only about half what it was in early November. Some of the demand has been funneled to other AI startups like Anthropic and Cohere; Microsoft has not made its platform compatible with its LLMs.
But OpenAI’s asterisks and assets are now Microsoft’s problem.
The two companies are linked in a union that is eerily similar to a couple who were forced into marriage. They are learning from each other after the honeymoon and are stuck, semiliterally, between the richest and the poorest, and between sickness and health.
“There are natural limitations to growth in a company as large as Microsoft, so if achieving growth requires doing things in an unusual way, they should do it,” Sosnick said.
“But in the end, the risk is the same as that of any innovator in any technology: rivals can surprise you if they do it in a better way… Yes, diversification can help, but if you partner with five colleagues, that It doesn’t help either,” Sosnick said.
Allie Garfinkle is a senior technology reporter at Yahoo Finance. Follow her on X, formerly Twitter, at @agarfinks and in LinkedIn.
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