Microsoft (MSFT +2.11%) was founded in 1975, and since its stock listed publicly in 1986, it has been recognized by investors as a leader in the technology industry. It has amassed a $2.3 trillion valuation and is currently the second-largest company in the world, and it didn't get there by standing still.
Microsoft's Windows operating system, Word processing software, Xbox gaming ecosystem, and Azure cloud services platform are hallmarks of the company's evolution over the decades thanks to its relentless focus on innovation.
But where does it go from here? Earlier this year, Microsoft rocketed to the top of the artificial intelligence (AI) industry following a milestone investment in OpenAI, the creator of ChatGPT. Here's how this advanced technology could drive Microsoft forward for the next 10 years (at least).
NASDAQ: MSFT
Key Data Points
It might start with Bing
The version of ChatGPT released in November 2022 (GPT-3) took the tech world by storm with its ability to provide an answer to almost any question, and even write computer code. But it could only respond to text prompts, whereas the newer GPT-4, which came out in March, is capable of ingesting images.
It's a revolutionary upgrade. GPT-4 can code entire websites when presented with just a sketch to work from. It can program complex games, analyze drug compounds, and even help users launch a lawsuit.
Microsoft first invested in OpenAI in 2019, and when it announced a follow-up investment earlier this year, it was simultaneously integrating ChatGPT into its Bing search engine. Search isn't a very big part of Microsoft's business, accounting for just $12 billion of the company's total $207 billion in revenue over the last four quarters. But the upside of a ChatGPT boost could be enormous.
Bing only holds a 2.8% market share in the internet search industry, but with the help of ChatGPT, it wants to chip away at the 92.6% share held by Alphabet's Google. Microsoft estimates the digital advertising industry is a $500 billion annual opportunity, with search making up $200 billion of that.
The company believes every percentage point of market share Bing snatches from Google could be worth $2 billion in additional revenue every year. If it has 20% share in a decade from now, that would translate into at least $40 billion per year in revenue.
Microsoft stock trades at a price-to-sales ratio of 11 right now, so using that, Bing could be worth a whopping $440 billion in market capitalization if everything goes right.
OpenAI on Azure could become an even larger revenue source
Cloud computing is already the fastest-growing piece of Microsoft's business. Its Azure platform is ranked second in the industry by revenue, behind Amazon's Amazon Web Services. But that could soon change, because Microsoft is now offering advanced AI tools to its business customers powered by OpenAI and GPT-4.
In Q3, the number of OpenAI customers on Azure topped 2,500 which was a tenfold increase in just the lpst three months. But that's not all. Nvidia is about to make its DGX AI supercomputer available in the cloud through a range of providers including Azure. That means businesses all over the world will be able to train their own AI models using the most powerful computing platform publicly available.
But how valuable could those integrations be? According to a January 2023 report from Cathie Wood's Ark Investment Management, large language models and generative AI software (like ChatGPT) will be attracting $14 trillion in revenue by 2030. The problem is they don't have great distribution right now, which is why they need cloud providers like Azure to deliver the technology to the customer.
It's a win-win, because companies like OpenAI can immediately access millions of paying businesses, and Microsoft opens up a new revenue stream for itself.
Microsoft's direct stake in OpenAI could be worth a fortune in the future
There's no question Microsoft has already achieved lightning-fast growth in some of its AI initiatives. I mentioned how quickly the OpenAI-Azure partnership has attracted customers above, but Bing also saw installs of its mobile application quadruple in just two months since launching its ChatGPT integration.
The search engine now has 100 million daily active users, and in the quarter ended March 31, Microsoft said it successfully added to its U.S. market share.
But Microsoft isn't just using OpenAI's technology. It owns a stake in the company and stands to benefit from every deal it makes in the future. It's unclear exactly how much of OpenAI Microsoft currently owns, but reports suggest its latest investment totaled $10 billion, which valued OpenAI at $29 billion and implies Microsoft has a greater than one-third share.
If estimates about generative AI come true, the industry's combined enterprise value could total $90 trillion by 2030 and Microsoft has already hitched its wagon to the leader.
Since it's crystal clear that Microsoft intends to weave AI through almost every aspect of its business, there's no question the technology will dictate its success over the next decade -- and probably for some time after that.
