Microsoft’s Strategic $13 Billion Bet on OpenAI: A Game-Changer for Investors

In 2019, Microsoft (NASDAQ: MSFT) took a bold step by investing its first $1 billion in OpenAI, an innovative AI start-up located in San Francisco. Microsoft’s leadership, including Chief Technology Officer Kevin Scott, CEO Satya Nadella, and co-founder Bill Gates, were concerned that they had fallen “multiple years behind the competition in terms of machine learning.”

Specifically, Microsoft was wary of advancements made by Alphabet‘s Google, which has long held a prominent position in AI research with its DeepMind subsidiary. Seeing an opportunity, Microsoft decided to invest in OpenAI. This partnership has since expanded, and Microsoft’s total commitment now stands at $13 billion.

OpenAI’s launch of ChatGPT in late 2022 marked a significant milestone, quickly becoming the fastest-growing consumer application ever, amassing 100 million monthly active users in just two months. Following this success, analysts at JPMorgan Chase remarked, “We think that Microsoft’s investment into OpenAI, which started years ago, could potentially prove to be some of the best money ever spent.”

Here’s what investors need to know.

Image source: Getty Images.

Understanding Microsoft’s Smart Investment Move

Microsoft gains several advantages from its partnership with OpenAI. Firstly, as the exclusive provider of cloud computing services to the AI start-up, Azure has the opportunity to monetize all workloads that utilize OpenAI’s large language models (LLMs) and applications. Thus, Microsoft indirectly profits from products such as ChatGPT Enterprise.

Secondly, Microsoft has embedded OpenAI models into its software and cloud offerings. In 2023, the company launched Microsoft 365 Copilot—a generative AI assistant that enhances productivity in applications like Word, PowerPoint, and Excel. Almost 70% of Fortune 500 companies have already integrated Copilot. Additionally, the Azure OpenAI Service enables users to develop generative AI applications using OpenAI models, attracting 60,000 customers to Azure.

Lastly, Microsoft stands to earn a share of OpenAI’s profits, structured in several phases:

• Phase 1: OpenAI will allocate its first $194 million in profits to repay initial investors.
• Phase 2: For its next $17.3 billion in profits, OpenAI will distribute shares between its early investors and Microsoft, with Microsoft receiving 75% until it recoups its $13 billion investment.
• Phase 3: After the second phase, OpenAI will allocate 49% of profits to Microsoft until a specified cap is reached, the amount of which remains confidential.
• Phase 4: After Microsoft reaches its designated return cap, OpenAI will retain all profits thereafter.

It is worth noting that Microsoft has not yet completely fulfilled its $13 billion funding commitment to OpenAI, which currently poses a challenge to its earnings. For example, in the first quarter of fiscal 2025 (ending September 2024), Microsoft recorded a $683 million expense related to OpenAI’s losses. CFO Amy Hood anticipates this figure will rise to $1.5 billion in the second quarter.

However, analysts at Morgan Stanley predict that Microsoft will meet its funding cap by fiscal year 2026 (ending June 2026), at which point the company’s earnings growth could accelerate. For illustration, while Microsoft’s generally accepted accounting principles (GAAP) net income rose 11% in the last quarter, it could have surged to 14% without the $683 million OpenAI investment burden.

Is Microsoft Stock Worth Investing In Right Now?

In summary, Microsoft has committed a total of $13 billion to OpenAI over several years. In return, OpenAI exclusively uses Azure for cloud computing, with Microsoft set to recover its investment while also claiming 49% of OpenAI’s profits until a designated cap is reached.

Despite OpenAI’s financial losses—suggesting it may not become profitable until 2029—Microsoft’s investment is still seen as potentially transformative. Essentially, Microsoft has invested $13 billion for a profit-sharing agreement with a company recently valued at $157 billion.

Furthermore, Microsoft’s earnings growth is expected to accelerate after completing its funding obligations to OpenAI. Although Wall Street predicts a 9% earnings increase over the next year, forecasts show an annual rise of 14% through fiscal 2028, suggesting considerable future growth potential.

Consequently, while the current earnings valuation of 35 times may seem high, it’s not overly excessive. Among the 56 analysts monitoring Microsoft, 91% rate the stock as a buy, with a median price target of $500 per share indicating an 18% upside from the current price of $422. For patient investors, acquiring a modest position today appears reasonable.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, JPMorgan Chase, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.