04:19 PM EDT, 10/21/2024 (MT Newswires) -- Microsoft's ( MSFT ) equity stake in OpenAI likely got diluted after the latter's most recent funding round, while the parent of ChatGPT is expected to contribute to Azure growth upside, UBS Securities said in a note e-mailed Monday.

Earlier this month, OpenAI said it closed a $6.6 billion funding round at a $157 billion post-money valuation. Thrive Capital led the round with a $1.25 billion stake, with other investors including OpenAI's existing backer Microsoft ( MSFT ), UBS said, citing media reports.

While Microsoft's ( MSFT ) exact stake in OpenAI is unknown, it likely diluted down in the funding round, with several media reports pegging the tech giant's incremental stake in the latest round between $750 million and $1 billion, UBS said in a note to clients.

"This could tell us something about the magnitude of investment that Microsoft ( MSFT ) wants to make in a single (albeit critical) technology partner," UBS analysts Karl Keirstead, Taylor McGinnis and Jeff Hickey said. "It could mitigate the risk of regulatory scrutiny on the Microsoft-OpenAI relationship."

In the last two quarters, Microsoft's ( MSFT ) financial results have largely been impacted by losses on its equity investments, UBS said, citing the company. "While not naming OpenAI, it seems clear that Microsoft's ( MSFT ) stake in OpenAI and the resulting losses are impacting (earnings-per-share) growth," the analysts said. "Even for a company at the scale of Microsoft ( MSFT ), an annualized $2 billion or (roughly) 2% drag on pretax income is not immaterial."

OpenAI is projected to generate $3.7 billion in revenue this year, growing to $11.6 billion next year and $26 billion in 2026, UBS said, citing articles published in the New York Times and The Information.

The brokerage expects the Azure cloud-computing business' artificial intelligence revenue of $7.65 billion this year. "If Microsoft ( MSFT ) is reporting $3 billion of OpenAI spend on Azure in 2024, then OpenAI alone would represent (about) 40% of Azure AI (revenue)," the analysts said. If OpenAI's revenue reach $11.6 billion in 2025, "then we'd be talking about $8.1 billion of reported Azure (revenue) from OpenAI alone."

For next year, UBS projects $14.8 billion in Azure AI revenue. "If these OpenAI estimates are even roughly accurate, Azure estimates would appear to have an upward bias," the trio wrote.

Recent media reports have suggested that Microsoft's ( MSFT ) "exclusive" agreement with OpenAI to be its cloud infrastructure provider for both training and inference could change, UBS wrote. "This isn't necessarily a negative for Microsoft ( MSFT ), as the (capital expenditure) needs to solely service OpenAI could end up being so material."

The media didn't report that Apple ( AAPL ) participated in OpenAI's latest funding round. This could "dampen investor enthusiasm for a tighter Apple-OpenAI partnership that would spur on Azure inference demand," the UBS analysts said.

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