Love
it
or
hate
it,
there’s
no
doubt
that
artificial
intelligence
is
one
of
the
big
investment
trends
at
the
moment.
Expectations
for
how
the
world
will
change
as
intelligent
machines
become
more
integrated
in
our
day-to-day
lives
seem
to
be
at
an
all-time
high
at
the
moment,
and
a
race
to
create
the
best
AI-driven
chatbot
has
kicked
off
for
real,
with
the
emergence
of
ChatGPT
(OpenAI),
Bard
(Google)
and
of
course
Mo
(Morningstar’s
version).
It’s
something
that
pops
up
in
our
coverage
as
well;
recently,
we’ve
studied
the
long
history
of
AI,
and
co-manager
of
Sanlam
Global
Artificial
Intelligence
Chris
Ford
told
us
that
the
somewhat-hard-to-define
technology
will
come
to
define
the
next
decade.
But
if
you
want
to
invest
in
the
technology,
what
are
your
options?
Our
analysts
have
taken
the
pulse
of
the
chatbot
sector
and
selected
a
stock
they
believe
has
an
edge
on
the
competition.
Microsoft
an
Early
Leader
Morningstar’s
pick
for
the
sector
is
Microsoft
(MSFT).
The
company
made
its
third
round
of
investments
in
OpenAI
in
January
this
year
–
famed
for
its
artificial
intelligence
tool
ChatGPT
which
has
captured
both
investors’
and
the
public’s
attention.
The
deal
is
believed
to
be
worth
$10
billion
for
49%
of
the
company.
Our
analysts
believe
this
deal
sets
Microsoft
up
to
be
one
of
the
prime
beneficiaries
of
the
sector.
The
company
has
early
access
to
OpenAI
technology
and
is
already
incorporating
AI
throughout
its
suite
of
tools,
including
Azure,
Microsoft
365,
GitHub
and
Big.
Meanwhile,
OpenAI
benefits
from
the
invested
cash
and
from
using
Azure
as
the
exclusive
cloud
platform.
Morningstar
analysts
Dan
Romanoff
and
Jack
Keegan
explains
that
some
of
the
future
benefits
of
this
partnership
are
not
yet
baked
into
our
base-case
estimates
for
Microsoft,
which
we
currently
view
to
be
modestly
undervalued.
This
is
based
on
an
apparent
expectation
that
near-term
demand
will
remain
under
pressure
over
the
next
several
years.
“Given
the
immense
potential
for
productivity
improvements,
we
can
envision
an
upside
scenario
that
is
5%-10%
above
our
fair
value
estimate,
thanks
to
higher
AI-bolstered
revenue
growth.
Still,
we
caution
investors
on
the
AI
hype
for
Microsoft
as
the
company’s
immense
size
makes
it
difficult
for
any
new
product
to
dramatically
move
the
needle
on
valuation,
in
our
view,”
they
say.
Romanoff
and
Keegan
believe
OpenAI
to
be
a
sound
strategic
investment
for
Microsoft,
and,
do
not
see
it
as
a
drag
on
its
operating
margins.
Instead,
they
envisage
revenue
estimates
to
trend
upwards
over
time
from
the
inclusion
of
advanced,
generative
AI
features
within
Microsoft
applications.
“On
a
financial
basis,
our
initial
estimate
is
that
OpenAI
can
boost
Microsoft’s
revenue
growth
by
50-100
basis
points
annually
over
the
next
five
to
10
years;
this
should
not
put
material
pressure
on
margins
and
can
add
in
excess
of
$20
to
our
fair
value
estimate.
Yet,
we
have
not
specifically
incorporated
these
factors
into
our
estimates
based
on
the
high
level
of
uncertainty
attached
to
AI
adoption
and
exactly
what
shape
unannounced
AI
solutions
might
take
over
the
next
few
years.”
Competition
is
Close
Behind
Microsoft
now
has
an
early
lead
in
AI,
but
Morningstar
expects
other
software
vendors
to
replicate
Microsoft’s
moves
–
striking
partnerships,
building
their
own
AI
models,
and/or
using
APIs
to
incorporate
AI
into
their
own
products.
Microsoft
should
still
remain
ahead
of
others
over
the
next
few
years,
but
it
certainly
won’t
be
the
only
software
supplemented
by
AI.
However,
AI
is
an
expensive
proposition,
and
our
analysts
believe
this
will
serve
to
limit
competition.
It
takes
the
right
people,
hardware
and
infrastructure
investment
–
most
of
this
is
most
easily
found
at
“hyperscalers”
like
Microsoft
and
Alphabet.
AI
Revenue
Will
Grow
What
Next
for
OpenAI?
Our
analysts
believe
OpenAI
generated
less
than
$50
million
in
revenue
in
2022,
is
set
to
hit
$200
million
in
revenue
in
2023
and
$1
billion
in
2024.
“This
represents
substantial
growth
and
helps
explain
why
Microsoft
would
invest
$10
billion
for
49%
of
the
company.
Given
the
long-standing
promise
and
enormous
potential
of
AI,
this
level
of
growth
is
not
unfounded
in
our
view.”
However,
a
ceiling
will
eventually
be
hit,
and
they
do
not
believe
AI
is
going
to
generate
anywhere
near
$1
trillion
annually
in
revenue
for
software
providers.
Moreover,
there
is
currently
a
lack
of
disclosure
around
the
revenue
that’s
being
derived
from
applications
on
the
market
now.
And,
don’t
forget
that
AI
elements
are
not
new;
they
have
been
around
for
years
already
and
are
present
within
many
software
companies.
“Within
our
coverage,
we
point
to
powerful
AI
assistants
and
features
in
the
form
of
Einstein
within
Salesforce,
and
Sensei
within
Adobe.
We
surveyed
10
data
providers
to
estimate
the
market
size
for
AI,
and
checked
these
estimates
against
total
annual
software
spending
of
approximately
$800
billion
to
arrive
at
our
own
market
size
estimate.”
For
OpenAI,
our
analysts
predict
two
likely
outcomes
for
market
exit:
an
IPO
or
an
outright
acquisition
by
Microsoft.
“We
believe
it
is
likely
that
Microsoft
eventually
acquires
the
remaining
51%
of
OpenAI.
It
seems
likely
that
Microsoft
already
tried
to
acquire
OpenAI
outright
but
the
founders
may
have
been
wary
of
a
full
corporate
ownership.”
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