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By now, investors are well aware of the $13.5 billion investment into OpenAI by Microsoft (MSFT) - including the $10 billion it earmarked for the artificial intelligence (AI) start-up in January 2023. That major move into AI lit a fire under Microsoft’s stock, which is up by more than 56% in the past 52 weeks.
There will be more stock gains to come as Microsoft wisely diversifies its bet on AI, rather than putting all of its “eggs” into OpenAI’s “basket.” For example, on Feb. 26, it was announced that the company had struck a deal with French artificial intelligence start-up Mistral.
Mistral Investment, Microsoft, and Nvidia
Microsoft president Brad Smith unveiled a “multiyear partnership” with Mistral to help the 11-month-old company bring its AI models to market.
As part of the deal, Microsoft said it would invest in Mistral, although no financial details have been disclosed. The partnership will include a research and development collaboration to build applications for governments across Europe.
The partnership makes Mistral just the second company to provide commercial language models on Microsoft’s Azure cloud computing platform. Arthur Mensch, co-founder and CEO of Mistral, said: “Microsoft’s trust in our model is a step forward in our journey to put frontier AI in everyone’s hands.”
Mistral received a €2 billion ($2.19 billion) valuation in December 2023 in a funding round worth roughly €400 million ($437 million). The new investments were led by prominent Silicon Valley venture firm Andreessen Horowitz, and others involved in the funding round included tech giants Nvidia (NVDA) and Salesforce (CRM), U.S. venture capital firm General Catalyst, and former Google (GOOGL) head Eric Schmidt.
This lofty valuation was a substantial increase from June 2023, when the weeks-old company raised €105 million ($115 million) at a €240 million ($262 million) valuation in a deal led by Lightspeed Venture Partners.
Bringing on Nvidia as an investor and strategic partner was a wise move, and will give Mistral access to Nvidia’s latest innovations.
Who Is Mistral?
Founded in April 2023, Mistral has quickly emerged as one of Europe’s brightest and best-funded hopes in the field of generative AI. Like Microsoft-backed OpenAI, Mistral is working on generative AI through so-called large language models (LLMs) that are capable of creating human-like prose and code in seconds.
The development of the technology is capital-intensive, however, as LLMs require copious amounts of computer processing power - even though one of the French company’s founders, Arthur Mensch, said in October that their technology was more efficient and cost less than the ones being developed by its larger U.S. rivals.
Mistral’s models are “open source,” meaning technical details will be released publicly. This will allow developers and companies to build on top of it and contribute to its advancement. This approach stands in stark contrast with the approach of ChatGPT maker OpenAI, whose latest model GPT-4 is a ‘black box,’ in which the data and code used to build the model are not available to third parties.
In January, the French AI start-up became the toast of Davos (the annual meeting of the world’s elite business and political leaders). “Chief executives of three large tech companies told the Financial Times the group’s latest AI model was one of the best available products, according to technical benchmarks used by companies to evaluate their performance,” according to an FT report.
Add it all up, and it’s a savvy investment by Microsoft that should add to its AI toolbox.
Buy MSFT Stock
Already, the financial impact of Microsoft’s investments in AI are showing. In the last quarter, the company beat market estimates for quarterly profit and revenue.
It was only in November that Microsoft started selling Copilot, an AI assistant, for $30 per month. Early sales of the product showed up in its commercial sales of Office software, where revenue grew 17%, compared with analyst expectations of commercial Office sales growth of 14.2%, according to data from Visible Alpha.
New artificial intelligence features helped attract customers to its Azure cloud service, as they built out their own AI services. And Microsoft reported that 6 percentage points of Azure's growth rate in the latest quarter was attributable to AI - double the prior quarter's growth rate.
I consider Microsoft to be a strong buy based on AI opportunities, as well as its ongoing cloud business, with strong traction for cloud versions of Office, Dynamics, Teams, and Azure infrastructure cloud services.
Sales from all “cloud-based” businesses is now about two thirds of total sales. As Microsoft continues to pursue long-term growth through its AI and cloud investments, I see a number of ways that the company will be able to monetize the explosion of generative AI - cloud, CoPilot integration, OpenAI, search expansion, and so on - even more.
Although not immune from any macroeconomic weakness, Microsoft has about as diversified and strong a set of assets as any company in the technology industry - and may even be seen as a haven by investors in uncertain times. The company also has a large cash cushion and a rock-solid balance sheet.
Buy MSFT stock during any temporary bouts of market weakness below $435.
