David Ramos
Just when we thought Microsoft Corporation (NASDAQ:MSFT) was done for the time being in its attempt to disrupt Google’s (GOOGL) (GOOG) search advertising model, CEO Satya Nadella had other ideas.
He introduced the general availability (GA) of Azure OpenAI Service as Microsoft is committed to making available “the world’s most advanced AI models” to its customers. The announcement came before Microsoft announced its 10K headcount reduction, estimated to be less than 5% of its global employee count.
However, Microsoft’s layoffs should not be viewed negatively as a sign of significant weakness in the company’s growth cadence. Instead, we believe Microsoft is not immune to the macroeconomic and geopolitical headwinds that have befallen Amazon (AMZN), Meta Platforms (META), and other tech peers.
We assess Microsoft is using these headwinds as an opportunity to realign its strategic imperatives on Generative AI, which Nadella claimed its “systems architecture has been a massive breakthrough because [of] the way these workloads or the way you train large models is very different than anything out there.”
In a recent interview with the WSJ on the sidelines of the World Economic Forum Davos 2023, Nadella argued that the development of OpenAI’s ChatGPT has reached an inflection point. As such, the progress from GPT 3 to 3.5 and further “is not linear progress.” Therefore, MSFT investors and customers should be prepared for possibly even more stunning developments ahead when OpenAI decides to release its most updated GPT model: GPT-4.
Notably, OpenAI’s CEO Sam Altman accentuated that the release will “come out at some point when [OpenAI is] confident [they] can do it safely and responsibly.” As such, we believe that Microsoft is likely confident enough in its developments on the legal and ethical front to consider releasing it on GA, which is a highly significant development.
Why? Nadella made it clear what he believes such a release could entail. He stressed:
The one thing that I think it’s probably worth stating [about] ChatGPT and GPT family of models is something that we’ve partnered with OpenAI deeply now for multiple years. And we built in Azure, our public cloud infrastructure, an AI supercomputer. So I think at this point, the way Microsoft’s going to really commercialize all of this is Azure has become the place for anybody and everybody who thinks about AI and large-scale training. And we are way ahead on that and we continue to plan to sort of really step it up there. Second, we are going to make these foundational models available as platforms. So that means anybody who wants to build on them in any domain can build on top of that. And then we will incorporate this [into] our own application. So you can fully expect us to obviously every product of Microsoft will have some of the same AI capabilities to completely transform the product – Satya Nadella interview with WSJ
So that’s the key message. Microsoft likely sees a massive opportunity to disrupt Google in every way, from advertising to software to cloud computing with its AI.
Wedbush analyst Dan Ives aptly stated that “ChatGPT is a paradigm changer, and Google now has a real battle on its hands with ChatGPT and Microsoft backing it.”
As such, while Microsoft is cutting jobs as it realigns its growth priorities in an increasingly harsh capital spending environment, it likely sees its investment in OpenAI leading the next phase of growth.
It will be interesting to see how Amazon (AMZN), the cloud IaaS market leader, responds to Microsoft’s threats and progress with Generative AI. Stratechery’s Ben Thompson noted, “Amazon uses machine learning across its applications; What is already important is AWS sells access to GPUs in the cloud.”
As such, AWS has the IaaS scale to offer significant resources for companies like OpenAI to run inferences in the cloud. And the company has a full suite of AI/ML services to meet its customers’ needs. But, the company needs to be fast. As the market leader, Amazon has the most to lose if it cedes substantial market share to Microsoft.
Leading corporate executives who attended Davos 2023 have lauded ChatGPT for its “transformative technology.” Coursera CEO Jeff Maggioncalda acclaimed it as a “game changer.” He has plans to integrate ChatGPT into the company’s education courses moving ahead. Magic Leap CEO Peggy Johson also intends to leverage ChatGPT into its workflow, potentially bringing more business to Azure.
Is Generative AI creating too much hype now? Possibly. With OpenAI potentially valued at 100x revenue, it’s hard to argue against that. Yet, Microsoft, a 47-year-old company, is willing to embrace disruptive technology so quickly in its business use cases that Google fears it, indicating its immense potential.
As Nadella aptly highlighted to his employees in his email explaining the headcount reduction:
These are the kinds of hard choices we have made throughout our 47-year history to remain a consequential company in this industry that is unforgiving to anyone who doesn’t adapt to platform shifts. – Insider
With MSFT’s NTM EBITDA of 16.3x, above its 10Y average of 14x, Nadella possibly knows the company needs to provide a significant growth driver to keep buyers onside.
And OpenAI’s GPT models could prove to be one of Nadella’s most astute and transformative investments in Microsoft’s illustrious history.
Rating: Buy (Reiterated).
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