Sam Altman, left, appears onstage with Microsoft CEO Satya Nadella at OpenAI's first developer conference, on Nov. 6 in San Francisco.Barbara Ortutay/The Associated Press
If there were still any investors who were reluctant to accept artificial intelligence as an area with enormous potential, the uproar of the past week involving OpenAI may have brought them around – and given them a fresh perspective on Microsoft Corp. (MSFT-Q) as the AI-themed stock to watch right now.
OpenAI is the San Francisco-based research company that developed ChatGPT. The chatbot’s release last year ushered in a new era for generative AI that some observers believe will prove as important as the widespread adoption of the internet in the mid-1990s.
The events of the past week may have bolstered the importance of AI, and its leaders.
OpenAI’s board ousted Sam Altman as chief executive officer on Nov. 17, for reasons that remain unclear, setting in motion a series of steps as employees revolted and stakeholders worked to have him reinstated.
Microsoft, OpenAI’s biggest backer, offered to hire Mr. Altman to lead its own advanced AI research team. And many of OpenAI’s 700 employees threatened to quit without him at the helm, potentially offering the tech giant a valuable work force.
How valuable? Microsoft shares jumped as much as 2 per cent during intraday trading on Monday, when it seemed likely that the company would win Mr. Altman to its ranks. That marked an increase of US$59-billion in the company’s market value.
Microsoft didn’t get Mr. Altman. He returned to OpenAI under a mostly new board this week. But the tumult – and the efforts to fix it – may have reinforced the view that AI has emerged as a dominant force in the business world.
And this dominance arrives at a time when technology companies are starting to produce quarterly financial figures that hint at AI’s potential.
“A key theme from this tech earnings season has been that AI monetization has begun to positively impact the tech sector with Nvidia Corp., Microsoft, Datadog Inc. and Palantir Technologies Inc. all delivering robust results that give further confirmation that AI use-cases are exploding across the enterprise and consumer landscape,” Daniel Ives, an analyst at Wedbush Securities, said in a note.
Nvidia’s (NVDA-Q) third-quarter financial results, released this week, were a highlight of the earnings season. The company, which makes the chips that power AI technologies, including ChatGPT, reported that its quarterly revenue leapt 206 per cent over the same period last year. Incredibly, its profit increased by 49 per cent from the previous quarter.
“AI will lead the new tech bull market which we believe is already well under way,” Mr. Ives said.
No kidding. The four tech stocks that Mr. Ives identified as benefiting from the rollout of AI have risen by an average of 137 per cent this year, led by Nvidia’s 233-per-cent gain. OpenAI is not a publicly traded company available to regular investors. But its valuation has risen above US$80-billion this year, or three times what the company was worth at the start of the year.
Clearly, AI has already captured the attention of quick investors who recognized the technology’s potential after the launch of ChatGPT last year. That raises concerns that another asset bubble will form as more investors jump on the opportunity.
That’s a risk, but latecomers shouldn’t fear a repeat of the tech-bubble implosion in 2000 just yet. While the late 1990s saw the rise of companies with flimsy business models and absurd valuations, key stocks within the AI theme are at least grounded on realistic growth assumptions.
Atif Malik, an analyst at Citigroup, believes that Nvidia shares should be valued at 35 times forecasted earnings, which underpins his estimate that the share price will rise to US$575 within 12 months, up from about US$487 on Thursday. Lofty? Sure. But this target price implies a gain of about 20 per cent over the next 12 months, which is hardly ebullient when it comes to AI-themed stocks.
Another approach is to focus on Microsoft, a company whose operations span workplace software, cloud computing, gaming – and AI.
It may not have succeeded in hiring Mr. Altman this week, but the status quo isn’t bad at all: Microsoft owns a 49-per-cent stake in OpenAI and enjoys warm relations with Mr. Altman. That virtually guarantees a leading role for the company as AI moves into the mainstream, powering research, data centres and corporate efficiency efforts.
In its most recent quarter, Microsoft reported that its profit increased to US$22.3-billion, up 27 per cent from the same period last year and ahead of analysts’ estimates.
The stock hit a record high this week, suggesting that the market is already aware of the potential here. But the acceleration of AI’s rollout over the next couple of years is the reason to stay invested.