Apple Sues OpenAI, Here's What It Means for Oracle and Microsoft Investors
Key Points
Oracle and Microsoft have underperformed their peers, partly due to their exposure to OpenAI.
Apple's lawsuit against OpenAI could affect Oracle and Microsoft because of their deep ties and working relationships with OpenAI.
Apple's (NASDAQ: AAPL) lawsuit against OpenAI has consequences that go beyond the two companies and raise questions for investors in Oracle (NYSE: ORCL) and Microsoft (NASDAQ: MSFT). Both companies have significant ties to OpenAI, and those ties are arguably why the two stocks have notably underperformed this year.
Apple sues OpenAI
The consumer electronics giant alleges that OpenAI stole trade secrets from Apple and instructed staff hired from Apple on how to do so. These are serious allegations, and while they are focused on the hardware side (OpenAI is believed to be developing a device that could challenge the iPhone in the future), they could materially impact OpenAI's reputation, position in Apple's ecosystem, its nascent hardware business, and its intended initial public offering (IPO).
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Oracle and Microsoft
Fleshing out the last point, the chart below shows the underperformance of Oracle and Microsoft compared to the other leading hyperscalers, Alphabet, Amazon.com, and IBM. Clearly, this isn't just a question of the market turning skeptical over the rising cost of the artificial intelligence (AI) infrastructure build-out.
Data by YCharts
It's not just an issue for equity markets, as Oracle's credit default swap (CDS) pricing (the cost of insuring against a default in Oracle bonds) soared after the announcement of a $300 billion deal with OpenAI last year and hasn't come down since. In addition, the credit rating agency S&P Global Ratings recently downgraded Oracle's debt to a BBB- rating, the lowest tier of investment-grade debt.
Part of the reason for the ratings downgrade is the key credit risk for Oracle tied to the OpenAI deal. According to S&P Global Ratings' estimate, "OpenAI makes up roughly half of the $638 billion" of Oracle's remaining performance obligations (RPO).
Microsoft's exposure to OpenAI is also significant. On an earnings call in January, Microsoft's management disclosed that 45% of its commercial RPO comes from OpenAI. Moreover, according to its most recent 10-Q filing, Microsoft holds an investment of about 27% in OpenAI. Based on the last OpenAI funding round, that share could be worth about $230 billion, or about 8% of Microsoft's current market cap of $2.9 trillion.
Where next for AI stocks?
The developments at OpenAI are concerning, not least as it's such an important part of the AI industry. That said, it's unclear where this case will end up, and there are plenty of ways to invest in AI outside of Oracle, Microsoft, and the OpenAI IPO, whenever that happens, if you want to avoid the risk that OpenAI won't meet its earnings and cash-flow expectations.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, International Business Machines, Microsoft, Oracle, and S&P Global. The Motley Fool has a disclosure policy.