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OpenAI: Open to an IPO?

Artificial intelligence quickly became one of 2023’s hottest topics, mainly on the heels of OpenAI’s November 2022 public launch of ChatGPT. Will OpenAI make an IPO, and would it be a good investment?

Whether you have warm feelings or general distrust towards ChatGPT and similar AI products is immaterial – the technology’s enjoyed massive consumer attention, with the service taking only two months to hit 100M unique users. This success is unprecedented, as highlighted by the relative speed of other popular apps:

 

App

Months to 100M Users

TikTok

9

Instagram

30

Spotify

55

Uber

70

Telegram

61

 

The question on many investors’ minds is, How can I get a piece of OpenAI? 

Deal hunters had OpenAI on their radar for months before release, but the rapid growth and enduring popularity sparked an endless interest. That broad investor sentiment compounded when, at the end of January 2023, Microsoft invested an additional $10B on top of its original 2019 cash infusion.

Unfortunately for retail investors, OpenAI remains private and hasn’t yet announced a planned IPO.

But that doesn’t mean one isn’t in the cards – nor are they the only artificial intelligence investment opportunity in town.

According to the Wall Street Journal, As of January 2023, OpenAI was in funding talks with venture capital firms Thrive Capital and Founders Fund for a private tender sale of shares. The tender sale would allow would-be investors to buy shares from existing shareholders for up to $300 million. 

More from Microsoft

The details of Microsoft’s (MSFT) $10B investment are scarce and intentionally obscured from the public for now. The company’s AI CVP, Eric Boyd, describes the new arrangement as “multiple years and multiple billion dollars.”

Still, anonymous insiders reported to Bloomberg and other outlets that the deal is worth $10B, which pins OpenAI’s valuation at around $29B. However, private firm valuations are notoriously tricky to calculate without access to financials and other critical data.

Is IPO an Option?

No one at either OpenAI or Microsoft (or other early investors) has hinted at an IPO, although that doesn't mean one isn't in the cards. In addition to cash flow, expanding their relationship with Microsoft opened additional opportunities to expand their digital footprint; as indicated by Boyd, "we're the exclusive cloud partner for OpenAI."

This indicates expected future growth and, with Microsoft leveraging the technology for enterprise and retail consumers alike, leveraging a first-mover advantage for Microsoft and OpenAI to gather critical user data from various sources and fine-tune their processes – perhaps anticipating a future public offering.

Critics may point to the presumably low revenue streams (many users opt for the free version) as evidence that OpenAI's valuation is inflated and an IPO would fall flat. However, the situation isn't without precedent.

Square, Inc (now Block) pushed a last-minute Series E funding round that pushed the valuation to $6B, which raised eyebrows considering they operated at a substantial loss. Soon after, the company went public via IPO and saw a fall from grace to a $2.9B market cap.

But, as we said, private firm valuations are tricky and complicated further by complex equity arrangements (the final Series E investors ultimately came out ahead despite facing substantial paper losses at IPO due to contractual nuance).

To see if we could get some insider knowledge, we went to the source and asked ChatGPT whether it thought an IPO is in the cards. The language model had this to say: 

 

"While OpenAI's long-term plans remain unknown, it is possible that the company may choose to remain private or pursue alternative paths for raising capital and scaling its business."

Source: ChatGPT

 

Bottom line: it's impossible to know whether OpenAI will IPO soon, but rapid user growth and expanded infrastructure opportunities via Microsoft are promising. There are, however, promising alternatives for eager investors.

Alternative AI Stocks

The simplest way to get a piece of OpenAI is to invest in Microsoft – its shares are up more than 15% since the January announcement, compared to the overall market’s paltry 0.19% return.

 

Source: Morningstar

 

Microsoft is a possibility for conservative, blue-chip investors, but those willing to risk a little to gain a lot may be more interested in less well-known alternatives. These public alternatives also give insight into whether OpenAI is a quality potential investment if (or when) they go public.

 

ai (AI): enterprise-level data analytics and artificial intelligence solutions
    • Market cap today: $3B
    • Market cap at IPO: $10B

 

Source: Morningstar 

 

Rapid7 (RPD): AI-powered cybersecurity provider
  • Market cap today: $2.4B
  • Market cap at IPO: $80M

Source: Morningstar

 

New Relic (NEWR): global data aggregation and analytics
  • Market cap today: $115M
  • Market cap at IPO: $80M

 

Source: Morningstar

 

Conclusion

Unfortunately, determining whether OpenAI will be a good investment at IPO is difficult as ChatGPT and the firm’s other services are effectively the first in their field. All we can do, therefore, is gauge their potential success by past results of companies that were similarly positioned at their IPO in the past decade.

Just from a glance, though, it seems that early movers have a distinct advantage and retained or grew their value despite the current volatility – with the exception, in this case, of C3.ai. However, C3.ai proves our point: data analytics is a flooded field, and a 2020 IPO was poorly timed while the late entry forced the firm to try to catch up to competition like New Relic.

As it stands, OpenAI is alone in providing generally actionable information and context via an accessible service. Whether they can retain that moat remains to be seen. Still, with a juggernaut like Microsoft backing the firm, OpenAI has resources and opportunities its competition can only dream of, which bodes well for a potential IPO.  

 

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