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Can Microsoft Win the Race to Dominate Artificial Intelligence?

When Microsoft (MSFT 1.30%) presented its second-quarter fiscal 2023 earnings on Jan. 24, 2023, management told Wall Street things it already knew. For instance, everyone knows that the short term looks bleak due to a poor macroeconomy.

If you are a bear, you can seize upon the fact that revenue growth is decelerating and guidance for the next quarter is less than expected as a thesis to avoid investing in the company. However, if you are a bull, the company highlighted several long-term secular growth drivers as premises for investors to buy the stock today.

One of those growth drivers that excite investors the most is what Microsoft CEO Satya Nadella describes as “the next major wave of computing … being born,” which is artificial intelligence (AI). Nadella believes that vast amounts of enterprise value will accrue to the companies that lead this new wave of computing. And if you follow its recent moves, Microsoft aims to be an AI leader.

You might wonder whether Microsoft has what it takes to position itself as an AI leader in the face of solid competition from companies like Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and whether it can monetize the opportunity enough to give people solid grounds to invest.

Let’s examine those questions.

Microsoft is throwing its hat in the AI ring

Until recently, Alphabet and Meta Platforms garnered the most attention as the leading companies in AI development from consumers, developers, and investors. However, in late November, an innovative company named OpenAI released a game-changing AI model on its website that some people believe could change the internet search experience. Then a few months later, two days before its second-quarter fiscal 2023 earnings release, Satya Nadella’s company made a massive investment in OpenAI, and it became official: Microsoft finally tossed its hat in the ring of AI competition.

Although Nadella has not given financial details on the deal, the news website Semafor published rumors that the terms the two sides negotiated were for Microsoft to provide $10 billion in funding and, in return, it “would get 75% of OpenAI’s profits until it recoups its investment.” After, Microsoft would own a 49% stake in OpenAI. Additionally, it becomes OpenAI’s exclusive cloud provider.

Investors only took a short time to process the possibility of Microsoft using OpenAI to make AI products more popular than Google — and they approved. As a result, the stock rose 10% from when the company announced its OpenAI investment on Jan. 23 to Feb. 2, 2023.

A new AI model named ChatGPT

This new AI model that OpenAI unleashed on the world in November 2022, which has so many onlookers excited, is a machine learning model named Chat Generative Pre-trained Transformer, or ChatGPT. This AI has many innovative uses, from translating one language to another, generating working computer code, and writing coherently on any topic. But, most impressively, ChatGPT can act as a customer service chatbot and create responses to human questions virtually indistinguishable from a natural human dialogue.

OpenAI’s model quickly became an internet sensation and soared past 1 million users within a week after its release. And many believe that by the end of January, it had already reached 100 million monthly active users, a rate of growth faster than TikTok, making it the fastest-growing app of all time.

Microsoft is already making use of ChatGPT in its own products. For example, on Feb. 1, the company announced that it was placing ChatGPT in Microsoft Teams Premium, its virtual meetings product. Should ChatGPT prove to be as effective a product as its current popularity suggests, you can expect to see OpenAI’s models across more Microsoft consumer and enterprise products.

AI is a long-term opportunity

If you have read many articles about OpenAI and ChatGPT over the last two months, you might think Microsoft’s investments in AI will have immediate positive returns. But hold your horses.

First, the technology is still experimental, and AI investments could take years to pay off. For instance, it would be wise for everyone to take note of the massive computing costs to power ChatGPT. Eventually, Microsoft will need to figure out how to lower those costs and how to monetize OpenAI’s machine-learning models in an affordable way for its customers. If it can’t, ChatGPT could wind up as nothing more than a wildly expensive toy.

Suppose you buy Microsoft for its potential to be an AI leader. In that case, you are counting on it and OpenAI to figure out how to improve ChatGPT’s responses (it’s still imperfect despite the hype), make the AI service profitable, and navigate legal challenges like the class action copyright lawsuit its AI code-generating software Copilot faces.

However, if you believe former Googlers Paul Buchheit and Sridhar Ramaswamy, Google’s cash cow of Search could be threatened by ChatGPT within a few years, helping complete Satya Nadella’s dream of running the world’s leading company in AI.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Rob Starks Jr has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.

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