Wedbush reiterates bullish outlook on Microsoft: New revenue-sharing agreement with OpenAI is a "net positive" as Azure AI monetization pressure is alleviated

According to reports, Microsoft (MSFT.US) and OpenAI have renegotiated the details of their revenue-sharing agreement. The new agreement not only helps OpenAI reduce expected payments by up to $97 billion but also allows Microsoft to receive payments earlier.

Under the new agreement, OpenAI has agreed to cap the total revenue share it pays to Microsoft at $38 billion by 2030. This payment cap is part of the renegotiated agreement made by both parties last month. Under the original agreement, OpenAI agreed to pay Microsoft 20% of its revenue before 2030. This percentage arrangement remains, but it is expected to reach the payment cap by 2028. Previous forecasts indicated that the amount OpenAI would pay Microsoft could be as high as $135 billion before the cap was set. The new agreement also removes the clause that required OpenAI to continue paying Microsoft royalties until achieving Artificial General Intelligence (AGI).

The updated agreement also allows Microsoft to reduce its reliance on OpenAI's models and further diversify its AI strategy. Under the new arrangement, OpenAI can sell its model products through other cloud service providers, and Microsoft no longer has exclusive partnership rights. Microsoft has currently invested $13 billion in OpenAI.

Regarding the latest agreement reached by both parties, Wedbush analysts stated in a report on Wednesday morning: "Importantly, while OpenAI saves a significant amount of spending in the long term, the renegotiated structure also eliminates OpenAI's previous option to defer some payments until 2032. This means that OpenAI is expected to pay Microsoft about $6 billion from its $30 billion revenue this year, compared to the previous forecast of about $4 billion."

Wedbush reiterated its "Outperform" rating on Microsoft and maintained a target price of $575, which represents a 41% upside from Microsoft's closing price of $407.77 on Tuesday. Wedbush noted: "We believe this revised structure is overall favorable for Microsoft and its AI strategy. Microsoft has traded off some optional revenue space in the later stages for several key structural victories and secured the intellectual property rights to use OpenAI's models and products until 2032, eliminating a previously open-ended risk regardless of when AGI is achieved."

Wedbush also stated: "Microsoft still retains its primary cloud partnership with OpenAI and its significant equity stake, allowing it to continue benefiting from OpenAI's growth as it moves toward an IPO. Additionally, Microsoft will no longer need to share revenue from selling OpenAI models to cloud customers through Azure, which will eliminate a significant drag on the commercialization economic model of Azure AI."