Microsoft (MSFT) shares climbed nearly 2% in after-hours trading on Thursday after the company announced a non-binding deal with OpenAI to revise their partnership terms. The agreement, anticipated for months, will allow OpenAI to restructure as a for-profit entity. This marks a major step forward in one of the most closely watched partnerships in artificial intelligence.
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OpenAI Prepares for New Corporate Structure
OpenAI has been operating under a capped-profit model that limited its ability to raise fresh capital. By moving to a for-profit structure with a more conventional governance framework, the company aims to attract new investors and eventually pursue a listing.
Reports suggest OpenAI is targeting a valuation of about $500 billion, with its nonprofit parent set to hold equity worth more than $100 billion.
Microsoft’s Investment Role Evolves
Microsoft has invested heavily in OpenAI, with $1 billion committed in 2019 and another $10 billion in early 2023. Under previous terms, Microsoft had exclusive rights to sell OpenAI’s software via Azure and preferred access to its technology.
The new deal may reduce those rights, as OpenAI has also signed large cloud contracts with Oracle (ORCL) and Google (GOOGL) to meet rising demand.
The memorandum leaves unanswered whether Microsoft will retain exclusive access to OpenAI’s newest technology. What is clear is that Microsoft wants continued integration of OpenAI’s models into its products, even as OpenAI broadens its partnerships.
Regulatory Approval Still Needed
The agreement remains non-binding, and several details are still under discussion. These include intellectual property rights, access to OpenAI’s APIs, and the level of control Microsoft will keep.
On the regulatory front, OpenAI must gain approval from attorneys general in California and Delaware to complete its restructuring. The company hopes to finalize the process before year-end, since some funding is tied to that deadline.
Any delay could create uncertainty for both OpenAI and Microsoft.
Is MSFT a Good Stock to Buy?
Wall Street has remained bullish on Microsoft despite the uncertainty. Turning to Wall Street, analysts have a Strong Buy consensus rating on MSFT stock based on 34 Buys and one Hold assigned in the past three months, as indicated by the graphic below. Furthermore, the average MSFT price target of $624.45 per share implies 24.64% upside potential.
