Love it or hate it, artificial intelligence is definitely one of the big investment trends right now.
Expectations about how the world will change as intelligent machines become more integrated into our daily lives now seem to be at an all-time high, and the race to create the best AI-powered chatbots is in full swing. It started with , ChatGPT (OpenAI), Bard (Google), and of course Mo (Morningstar’s version).
It’s something that comes out in our interviews as well. We recently studied the long history of AI, and Chris Ford, co-manager of Sanlam Global Artificial Intelligence, said this somewhat difficult-to-define technology will come to define his next decade. was talking
But what options do you have if you want to invest in technology? Our analysts have taken a look at the landscape of the chatbot space and selected stocks that they believe will give them a competitive advantage.
Microsoft is an early leader
Morningstar chose Microsoft (MSFT) in this space. In January of this year, the company made its third investment in OpenAI, best known for its artificial intelligence tool ChatGPT, which attracted the attention of both investors and the public. The deal is believed to be worth $10 billion for 49% of the company’s stake.
Our analysts believe the deal will make Microsoft one of the primary beneficiaries in this space. The company has early access to his OpenAI technology and he has already embedded his AI across a suite of tools including Azure, Microsoft 365, GitHub and Big. OpenAI, on the other hand, benefits from the cash invested and from using Azure as its purpose-built cloud platform.
Morningstar analysts Dan Romanoff and Jack Keegan said some of the future benefits from the partnership have not yet been factored into Microsoft’s baseline estimates and are currently slightly underestimated. He explains that he is thinking This is based on the clear expectation that near-term demand will continue to be under pressure over the next few years.
“Given the immense potential for productivity gains, we can envisage an upside scenario of 5% to 10% above our fair value estimate, thanks to the increased revenue from AI. , warns investors about the AI hype against Microsoft, as it is difficult for any new product to dramatically change the valuation needle,” they say.
Romanov and Keegan believe OpenAI is a sound strategic investment for Microsoft and don’t see it as a drag on operating profits. Rather, they expect revenue projections to trend upward over time by building advanced generative AI capabilities into Microsoft applications.
“On a financial basis, our initial estimate is that OpenAI could add 50 to 100 basis points of revenue growth to Microsoft each year over the next 5 to 10 years. However, the high uncertainty associated with AI adoption and the impact of unannounced AI solutions over the next few years could add more than $20 to our fair value estimate. We have not specifically incorporated these factors into our estimates based on how likely they are to take shape.”
The competition is just around the corner
Microsoft now holds an early lead in AI, but Morningstar warned that other software vendors would follow Microsoft’s lead—by forming partnerships, building their own AI models, and developing APIs. We hope to use it to incorporate AI into our products. Microsoft will continue to lead the pack for years to come, but it’s certainly not the only software that will be complemented by AI.
But AI is an expensive proposition, and our analysts believe this will limit competition. It requires investing in the right people, hardware and infrastructure. Most of them are easiest to find on “hyperscalers” like Microsoft and Alphabet.
AI revenues will increase
What’s next for OpenAI? Our analysts believe OpenAI will reach $200 million in 2023 and $1 billion in 2024, up from less than $50 million in revenue in 2022 .
“This represents significant growth and helps explain why Microsoft is investing $10 billion in 49% of the company. We believe that is not unfounded.”
But we will eventually hit the cap, and we don’t believe AI will bring nearly $1 trillion in annual revenue to software providers. In addition, there is a lack of disclosure regarding the revenue generated from applications currently on the market. And don’t forget the AI factor is something like: no New; these have been around for years already and are present in many software companies.
“The scope we cover refers to powerful AI assistants and features in the form of Einstein in Salesforce and Teacher in Adobe. data providers and matched these estimates to total annual software spending of approximately $800 billion to derive our own market size estimates.”
For OpenAI, our analysts predict two possible outcomes of market exit: an IPO or an outright acquisition by Microsoft.
“We believe it is likely that Microsoft will eventually acquire the remaining 51% of OpenAI. It appears that Microsoft was already trying to acquire OpenAI outright, but the founders would like to take full ownership of the company. We may have been wary of that.”
