Why Microsoft is the best exposure to OpenAI, according to this analyst

Key Concepts

• Market Capitalization: The total value of a company's outstanding shares of stock.
• GTC (GPU Technology Conference): Nvidia's annual conference showcasing its latest advancements in GPUs and AI.
• Blackwell: Nvidia's next-generation GPU architecture, expected to drive significant AI performance improvements.
• Hyperscalers: Large cloud computing providers like Amazon, Microsoft, and Google, which are major customers for AI hardware.
• Capex (Capital Expenditure): Spending by companies on physical assets like property, plant, and equipment. In this context, it refers to the infrastructure build-out for AI.
• AI Bubble: A concern that the rapid growth and investment in artificial intelligence technologies may be unsustainable and could lead to a market correction.
• Circular Economy (AI Context): A concept where various companies and technologies are interconnected and mutually beneficial within the AI ecosystem.
• Large Language Models (LLMs): AI models capable of understanding and generating human-like text, such as those developed by OpenAI.
• IPO (Initial Public Offering): The process by which a private company becomes public by selling shares to investors.
• Mag 7: A group of seven large-cap technology stocks that have historically driven significant market gains.
• AWS (Amazon Web Services): Amazon's cloud computing platform.

Nvidia's Market Cap Surge and AI Optimism

Nvidia has achieved a significant milestone by becoming the first company to reach a $5 trillion market capitalization. This surge is attributed to positive developments from its GTC event and strong optimism surrounding potential Blackwell sales, particularly to China. Doug Clinton, founder and CEO of Intelligent Alpha, notes that this rally occurs amidst widespread discussions of an "AI bubble," suggesting that markets often defy expectations by continuing to rise when such concerns are prevalent.

Clinton emphasizes that hyperscalers are unlikely to halt their investments in AI infrastructure, a trend that is being factored into Nvidia's valuation. He believes Nvidia's numbers are likely to continue their upward trajectory. The potential for Blackwell sales to China presents an additional upside catalyst, though its realization depends on a US-China agreement. Clinton estimates a 10-20% probability of the high-end GB200 (dubbed the "super duper chip" by President Trump) being fully opened up for sale in China, which could further boost Nvidia's stock.

Hyperscaler Capex and Growth Potential

In the near term, upcoming earnings reports from hyperscalers are expected to provide commentary on their continued commitment to infrastructure builds. Clinton anticipates that some street capex numbers for companies like Google and Amazon for the next year (currently projected at 12% and 9% respectively) might be too low, especially when compared to Meta's expected 40% growth. He suggests that Google and Amazon will likely announce continued or increased spending, indicating a strong continuation of their current pace rather than a dramatic acceleration.

Expanding AI Ecosystem and Partnership Dynamics

Nvidia's GTC event also highlighted a growing ecosystem of partnerships, including collaborations with companies like Uber, Lucid, and Nokia. Clinton views these announcements as a strategic move by management teams to leverage the positive impact on stock prices that partnerships with major AI players like Nvidia or OpenAI can bring.

While acknowledging the potential for these partnerships to expand growth opportunities, Clinton also raises the critical question of whether they will ultimately yield incremental cash flows for shareholders. He stresses that the true measure of success for these deals will be their ability to generate profits over a three to seven-year horizon, not in the immediate short term. Partnerships with companies like Uber, where AI integration might be less direct, are seen as having higher optionality rather than immediate value addition to Uber's core business.

Microsoft, OpenAI, and the Future of AI IPOs

The solidified partnership between Microsoft and OpenAI, following OpenAI's recapitalization, is seen as a significant development. Clinton, whose firm Intelligent Alpha uses LLMs for stock analysis, considers Microsoft a strong investment and the best direct exposure to OpenAI, which he believes is the leading AI company globally. This partnership is viewed as a win-win, enabling OpenAI to raise further capital to meet its substantial needs and securing Microsoft's substantial stake in what is expected to be a multi-trillion dollar company.

The eventual IPO of OpenAI is anticipated to be a "watershed moment." Clinton suggests that a robust IPO window, often signaled by major tech companies going public, can also indicate a market nearing its peak. While OpenAI's IPO might not signal the end of the AI trade, it could open the door for other companies to test the public markets. He advises caution when this happens, as it may lead to the IPO of lower-quality companies, potentially signaling a more genuine "bubble alarm."

OpenAI's "Too Big to Fail" Status

Clinton describes OpenAI as "too big to fail," not necessarily by initial design but as a consequence of its strategic partnerships. Collaborations with industry giants like Broadcom, Nvidia, AMD, and Oracle create a vested interest across the ecosystem for OpenAI's success. This interconnectedness allows OpenAI to finance its ambitious projects through the support of these partners, potentially creating a self-fulfilling prophecy for its growth and market valuation.

Intelligent Alpha's Stance on Amazon

Intelligent Alpha has not invested in Amazon, despite its Mag 7 status, as their models have consistently disliked the stock. Clinton points to two primary reasons:

1. Timing of Layoffs: The recent announcement of layoffs just two days before earnings is viewed with suspicion, suggesting a potential attempt to manage perceptions ahead of earnings.
2. AWS and AI Competition: While Amazon is the largest cloud provider, Clinton believes it is in third place in terms of AI leadership within the cloud space, trailing Google and Microsoft. He expresses concern that AWS might not meet market expectations for acceleration in Q3, a sentiment echoed by their models.