Wedbush reiterates bullish view on Microsoft Corporation (MSFT.US): New revenue sharing agreement with OpenAI is a "net positive" while monetization of Azure AI lags.

According to reports, Microsoft Corporation (MSFT.US) and OpenAI have renegotiated the details of their revenue-sharing agreement. The new agreement not only helps OpenAI reduce the expected payments of up to $97 billion, but also allows Microsoft Corporation to receive payments earlier. Under the new agreement, OpenAI has agreed to cap the total revenue share payable to Microsoft Corporation by 2030 at $38 billion. This payment ceiling is part of the agreement renegotiated between the two parties last month. Under the original agreement, OpenAI agreed to pay 20% of its revenue to Microsoft Corporation before 2030. This percentage arrangement remains in place, but it is expected to reach the payment cap by 2028. Previous estimates showed that OpenAI could have paid Microsoft Corporation up to $135 billion before reaching the cap. The new agreement also removes the clause requiring OpenAI to continue paying royalties to Microsoft Corporation until the achievement of Artificial General Intelligence (AGI). The updated agreement also allows Microsoft Corporation to reduce its dependence on OpenAI models and further diversify its AI strategy. Under the new arrangement, OpenAI is allowed to sell its model products through other cloud service providers, and Microsoft Corporation no longer has exclusive cooperation rights. Microsoft Corporation has currently invested $13 billion in OpenAI. In regard to the latest agreement reached by both parties, analysts at Wedbush stated in a report on Wednesday morning: "It is important to note that while in the long run OpenAI saves a significant amount of expenses, the renegotiated structure also cancels OpenAI's previous option to delay some payments until 2032. This means that OpenAI is expected to pay Microsoft Corporation approximately $6 billion from its $30 billion in revenue this year, compared to the previous forecast of $4 billion." Wedbush reiterated its "outperform" rating on Microsoft Corporation and maintained a target price of $575, representing a 41% upside potential from Microsoft Corporation's Tuesday closing price of $407.77. Wedbush noted: "We believe that the revised structure overall is favorable for Microsoft Corporation and its AI strategy. Microsoft Corporation has given up some potential later profits in exchange for several key structural wins and has secured the rights to use OpenAI models and products until 2032, regardless of when AGI is achieved, which eliminates a previously open-ended risk." Wedbush also stated: "Microsoft Corporation still retains its key cloud partnership with OpenAI and its significant equity stake, continuing to benefit from OpenAI's growth as it moves towards an IPO. Additionally, Microsoft Corporation will no longer need to share revenue from Azure selling OpenAI models to cloud customers, eliminating a key drag on Azure's AI commercialization economic model."