By investing in/partnering with ChatGPT developer OpenAI, Microsoft (NASDAQ:MSFT) received a big leg up on the competition in the artificial intelligence space. Yet as this big edge is possibly giving way to regulatory scrutiny, what does that mean for MSFT stock? This question plagues investors following news of regulators in the U.S. and U.K. looking into Microsoft’s game-changing transaction.
Although the news hasn’t affected share performance much, there are concerns about its potential negative impact on the stock in the future. Yet, while regulatory scrutiny is never a positive development, does this mean trouble ahead for shares? Not quite. As I’ll explain below, there’s no need to change your view on this AI winner just yet.
MSFT Stock: AI Deal Now in the Crosshairs of U.K. and U.S. Regulators
Last month, it appeared the boardroom drama transpiring at the time with Microsoft, OpenAI, and OpenAI founder Sam Altman was at best just fantastic fodder for business news headlines. However, as Business Insider recently pointed out, said drama has perhaps opened up a new can of worms.
That is, it appears Microsoft’s role in the Altman firing/re-hiring at OpenAI may just well be what has compelled the U.K.’s Competition and Markets Authority, as well as the U.S. Federal Trade Commission to inspect Microsoft’s transformative AI deal.
Given the aforementioned edge Microsoft has realized over the competition in generative AI thanks to this deal, coupled with the fact it has long been an FTC target, it’s easy to see how initial inquiries from regulators could in time morph into a regulatory headwind for the company.
Again though, don’t assume this means MSFT, after surging by over 56.2% in 2023, is at risk of experiencing a swift reversal in 2024, because of this possibly emerging issue. In fact, much still suggests that shares have a strong chance of experiencing another year of strong gains.
Separating Fears from the Facts
With this latest development, it’s best to separate fear and concerns from the facts. For one, it’s not as if either of the regulators is going to declare that Microsoft’s investment makes up an unreported change in control of OpenAI, much less is a transaction that threatens competition.
The structure of this deal, which entailed Microsoft investing $10 billion in non-profit OpenAI’s for-profit subsidiary for 49% of the subsidiary’s future financial returns, may have made liberal use of loopholes in U.S. merger law, but the structure follows the letter of the law, it may hold up in any future litigation.
It’s also questionable how acquiring access to OpenAI’s technology threatens the ability of rivals like Google parent Alphabet (NASDAQ,GOOG,NASDAQ:GOOGL) from reaching AI breakthroughs of their own. Even if the regulators find a legal “gotcha” that enables them to challenge the relationship, count on it taking many ways to finally happen.
In 2024, investors will continue to focus more on how the company’s competitive advantage in AI is having an increasingly greater impact on growth and profitability. This in turn points to more gains for MSFT stock.
The Verdict
Don’t get me wrong. I’m not saying that MSFT will make another more than 50% jump higher between now and next December.
What I am saying is that another year of mid-to-high double-digit gains for shares are well within reach. Sell-side analysts anticipate 15.3% earnings growth next fiscal year. The company’s latest guidance suggests that it can not only meet, but handily beat, these expectations.
Meanwhile, the jury’s still out whether recent regulatory inquiries intensify during this time frame. Much like the other OpenAI drama, it makes for great headlines. It’s not, however, the sort of development that should scare you out of a position.
While MSFT stock sits tight near its 52-week high, instead of selling/avoiding out of fear, feel free to maintain or build a position.
MSFT stock earns an A rating in Portfolio Grader.
On the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
