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 $85bn, 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 $80bn to $90bn which to me looks like an opportunistic event for two reasons.
  • First, requirements where I have doubts that Open AI actually needs the money.
  • It was only 9 months ago (see here) that Microsoft invested $10bn in OpenAI meaning that if it has run out of money already, then it has a cash burn of $1.1bn per month.
  • This is Reality Labs’ levels of cash burn which with 400 employees amounts to $2.75m per employee per month.
  • The vast majority of this spend will be going on compute costs where even with 100m 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 I suspect 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 I think 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 means that OpenAI can sell far fewer shares for the money it wants to raise, and its existing shareholders can also register large unrealised gains on their balance sheets.
• Consequently, I think that this raise is opportunistic in that the market has given OpenAI an opportunity to capitalise 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 that the insiders think that the valuation of the shares has hit a peak and at $85bn this is pretty hard to argue against.
• OpenAI is supposed to earn revenues of $250m this year and $1bn 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 me to think that competition is on the way.
• Hence, I think that price erosion is likely which in turn could lead to OpenAI missing the $1bn revenue estimate for 2024 and burning through even more cash than expected.
• OpenAI will not be alone and RFM Research has concluded that 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 $85bn but the timing of the raise is perfect.