Guest Post: OpenAI Haymaker?

OpenAI makes hay while the sun shines.

When a company that has issues with making profits can raise money at a valuation of $85 billion, it becomes abundantly clear that investors in generative AI have taken leave of their senses. 

Open AI is reportedly raising money at a valuation of $80 billion to $90 billion. This looks like an opportunistic event for two reasons. 

First, doubts over whether Open AI actually needs the money. It was only nine months ago that Microsoft invested $10 billion in OpenAI, meaning that if it has run out of money already, then it has a cash burn of $1.1 billion per month. This is Reality Labs’ levels of cash burn which with 400 employees amounts to $2.75 million per employee per month.  

The vast majority of this spend will be going to compute costs where even with 100 million users making 30 requests per day this is an uneconomic level of spending. This would mean that ChatGPT and generative AI generally can never become a viable business or generate a positive ROI and so one suspects that OpenAI has in fact got plenty of money left. 

Second, virtually free money. In the market’s mind, OpenAI is the leading generative AI company in the world (which is debatable). Furthermore, generative AI is the hottest theme in the technology sector by a wide margin, meaning that OpenAI sits at the pinnacle of what the market wants to own. This in turn means that OpenAI can sell far fewer shares for the money it wants to raise, and its existing shareholders can also register large unrealized gains on their balance sheets. Consequently, I think that this raise is opportunistic in that the market has given OpenAI an opportunity to capitalize on its fame and popularity. 

However, most telling of all is that employees will also have an opportunity to sell some of their shares as part of this transaction. Insider stock sales are often an indicator of the insiders’ view that the valuation of the shares has hit a peak. At $85 billion, this is pretty hard to argue against. 

OpenAI is supposed to earn revenues of $250 million this year and $1 billion next year, putting the shares on over 80x 2024 revenues. This is very high even in the best of times, but the plethora of start-ups and the thousands of models being made available for free by the open-source community leads one to think that competition is on the way. 

Hence, price erosion is likely which in turn could lead to OpenAI missing the $1-billion revenue estimate for 2024 and burning through even more cash than expected. OpenAI will not be alone, and many start-ups will suffer from price erosion that will cause their targets to be missed. This could well be the pin that pricks the current bubble, causing enthusiasm to wane and valuations to fall. 

OpenAI may not be worth $85 billion but the timing of the raise is perfect.

(This guest post was written by Richard Windsor, our Research Director at Large.  This first appeared on Radio Free Mobile. All views expressed are Richard’s own.) 

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Richard is our research director at large and also founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his recent tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector. He had covered Global Telecom Equipment covering companies such as Nokia, Motorola, Lucent, Qualcomm, Ericsson, Filtronic, Alcatel-Lucent amongst others. Later, Richard began looking at Handset software and became an industry leader in the space. He shifted from direct stock coverage to covering technology on a global scale, taking on responsibility of the complete technology ecosystem. His firm Radio Free Mobile is a partner firm of Counterpoint Research and covers the digital mobile ecosystem, accessing and comparing all of the global ecosystems.

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