OpenAI leases servers from Google. What do analysts say about the unexpected deal?

OpenAI's decision to use Google's computing power to train artificial intelligence came as a surprise to Wall Street: until now, the companies were perceived solely as fierce rivals in search. Nevertheless, the deal was a major win for Google's cloud business and should boost its valuation in the eyes of investors, analysts said. An additional driver, according to them, may be the use of Google's own chips for the needs of OpenAI.

OpenAI plans to tap Google's cloud services to meet growing demand for computing power to train artificial intelligence models, sources told Reuters. Negotiations on this have been going on for months, they said. Google, OpenAI and Microsoft, the largest investor in the ChatGPT developer, declined to comment;

- «Such a partnership would be unexpected given that ChatGPT is increasingly competing with both Google's search and its Gemini artificial intelligence,» wrote JPMorgan analyst Doug Enmuth, whose note was quoted by Investor's Business Daily. - However, the deal underscores Google's strengths in infrastructure and networking.»

- Analysts at Scotiabank also called the agreement «somewhat surprising» and said it opens up new growth opportunities for Google's cloud division, though they emphasized lingering concerns about competition with ChatGPT.

«This deal shows that both sides are willing to put aside their fierce rivalry for a while to cope with the gigantic demand for computing resources. We see this as a major win for Google's cloud business, but concerns remain that ChatGPT is becoming an increasing threat to Google's search dominance,» the analysts said in a note cited by Reuters.

- Morgan Stanley believes that the potential partnership could become «a driver for accelerating the growth of Google Cloud, which the market has not yet properly assessed». Bringing in a partner like OpenAI raises the cloud service's valuation in the eyes of investors, writes analyst Brian Novak, who calls the partnership «a significant positive development for Google's cloud business.» And since OpenAI's needs are only growing, it could «significantly accelerate Google Cloud's future growth.»

The deal, according to the analyst, also «sends an important signal about Google's confidence in the long-term prospects of its search business.» «If we assume that having computing power will be a competitive advantage when scaling GenAI products to hundreds of millions of users, can we assume that Alphabet would have agreed to give ChatGPT access to the Google Cloud if it really feared a threat to its cash cow, the search business?» -asked the question at Morgan Stanley.

For OpenAI, this is another step in diversifying infrastructure providers, Reuters notes. Previously, OpenAI's exclusive cloud computing provider was its largest investor, Microsoft. But in recent quarterly reports, Microsoft reported a shortage of computing capacity and said it would not object to OpenAI's contracts with other vendors. Last year, OpenAI turned to Oracle, which became a participant in the Stargate program to build data centers for OpenAI.

In addition, cloud service provider CoreWeave recently signed an agreement with OpenAI. The ChatGPT developer pledged to invest $350 million in CoreWeave's equity and pay the company $11.9 billion over five years for server leases. However, Stargate and CoreWeave will take years to ramp up capacity for OpenAI.

It matters which AI chips will be used to process OpenAI workloads in the case of its partnership with Google, writes Brian Novaκ of Morgan Stanley. He pointed out that Google could run OpenAI tasks either on Nvidia's AI chips (GPUs) or on its own TPU chips.

«There have been no credible reports yet on whether OpenAI will use TPUs or GPUs. And while the use of TPU cannot be ruled out, we think it is more likely that the company will continue to rely on GPUs from Nvidia for its computing power,» Novaκ stated. Choosing TPU would be «an even more bullish signal in favor of Google's unique technology solutions,» he said.