OpenAI’s 105x Revenue Multiple: What’s Driving Its $157 Billion Valuation?

Scalex Deal Briefing: OpenAI's Valuation of 1,600 Billion SEK (144 Billion USD) – Updated DCF and Multiples Analysis

Date: 3rd October 2024

Company: OpenAI

Sector: Artificial Intelligence

Deal: Latest Funding Round

Valuation: 1,600 billion SEK ( $157bn billion USD)

Lead Investors:

The lead investor in OpenAI's latest funding round is Thrive Capital , which contributed approximately $1.3 billion. Other significant participants in the round include Microsoft, Nvidia, and SoftBank Investment Advisers , with additional commitments from several other major tech and investment firms

Overview of the Deal

OpenAI, the AI company behind ChatGPT, has raised a funding round that values the company at 1,600 billion SEK (157 billion USD). This makes OpenAI one of the most valuable private companies in the world and reinforces its leadership in the rapidly growing artificial intelligence market.

This briefing provides an overview of how this valuation is justified using both Discounted Cash Flow (DCF) analysis and a Revenue Multiple perspective. We’ve modeled forward growth assumptions that help align with the valuation figure, and we explore what these numbers mean for OpenAI’s strategic positioning.

Key Insights from the Deal

1. Long-Term Growth Assumptions

To justify this valuation, we’ve assumed a 50% revenue growth rate over the next 20 years, followed by a 5% terminal growth rate beyond 2044. These aggressive growth assumptions are necessary to align with the 1,600 billion SEK valuation. OpenAI is expected to capitalize on the expanding demand for AI solutions across industries, significantly growing its revenue base and cementing its market dominance.

2. Revenue Multiples Analysis

In addition to the DCF approach, we examined the deal through a revenue multiple lens. With an estimated 2023 revenue of $1.5 billion USD, the implied revenue multiple is around 105x based on the $157 billion USD valuation. The 2024 revenue is estimated to be between $3.4 to $3.7 billion - giving a multiple of 46.2 on the budget figures for this year.

For context:

High-growth tech companies typically trade at 30-40x multiples.

OpenAI’s much higher multiple indicates the market’s belief in its disruptive potential, future expansion into various industries, and the possibility that its technology will fundamentally transform global markets.

As OpenAI continues its rapid growth, the revenue multiple will gradually compress. By 2028, assuming a static valuation of $157 billion USD, the multiple would drop to around 18.95x as revenues scale significantly. Of course - it can be that the company continues to develop new products (as we note below) that keep the valuation growing further (i.e. that there will not be a drop off). We have just made that assumption in this analysis to get a feel for the $157bn value.

Financial Model Summary

1. Discounted Cash Flow (DCF) Model Overview

We applied a DCF model with the following key assumptions:

Revenue Growth Rate: 50% annually for the next 20 years, reaching over $600 billion USD in annual revenue by 2044.

Operating Margins: Starting at 25% and increasing to 40% as the company scales.

Discount Rate (WACC): 11%, to reflect the high-growth, high-risk nature of OpenAI.

Terminal Growth Rate: 5%, reflecting continued, stable growth beyond the 20-year horizon.

Under these assumptions, the Enterprise Value (EV) from the DCF model reaches $164.27 billion USD, aligning closely with OpenAI's current $157 billion USD valuation. This result suggests that the market is pricing in significant long-term growth potential, supported by OpenAI's dominant position in AI and its strategic partnerships.

2. Key Revenue and Free Cash Flow Projections

The model assumes that by 2044, OpenAI will generate $617.29 billion USD in annual revenue with strong operating margins, contributing to a terminal value of $3.24 trillion USD. This terminal value reflects investors’ expectations that OpenAI will maintain a leading position in the AI space and continue delivering high-margin free cash flows for the foreseeable future.

Strategic Value and Market Sentiment

1. Dominating the AI Market

The market is pricing in a future where OpenAI is a dominant player across various industries. Its early leadership in generative AI, combined with its strategic partnership with Microsoft, positions OpenAI to drive significant revenue growth through AI-powered solutions for enterprises, governments, and consumers alike.

2. Revenue Potential and Monetization

While OpenAI’s current estimated revenue is $3.4 billion USD for 2024, its future growth potential is vast. Revenue streams could expand across various domains, including:

• Enterprise AI solutions via APIs,
• Industry-specific applications (e.g., healthcare, finance),
• Licensing AI models to various verticals,
• Potential new, unforeseen applications of AI technology.

3. Strategic Partnerships

OpenAI’s deep integration with Microsoft’s Azure gives it significant advantages in infrastructure scaling and distribution. This partnership is a key factor driving investor confidence and the high valuation, allowing OpenAI to expand rapidly into enterprise markets with the backing of a major tech player.

4. AI’s Network Effects and Competitive Moat

OpenAI benefits from network effects—the more data it processes, the more powerful and refined its models become. Its lead in this space, coupled with its vast training data, creates a strong competitive moat, making it difficult for other companies to catch up. Investors likely see this moat as one of the most significant factors supporting the 96x revenue multiple.

Conclusion: A Bet on Long-Term Leadership

OpenAI’s 1,600 billion SEK ($157 billion USD) valuation reflects the market’s expectation of exponential growth over the next 20 years.

Investors are betting that OpenAI’s technologies will fundamentally reshape entire industries, driving not just revenue growth but creating new markets and applications.

The DCF model with a 50% growth rate and 105x revenue multiple (historic revenue) and 46x (for current year) captures this optimism and positions OpenAI as a long-term leader in AI. While these assumptions are ambitious, they align with the belief that AI will continue to disrupt global markets, and OpenAI is at the forefront of that disruption.

As the AI market evolves, this valuation reinforces the idea that AI is the next frontier of technology, and companies like OpenAI are poised to capture a significant share of that future value.

Scalex Growth Partners Deal Briefing | October 2024

Appendix - Interesting to look at the team on this one.

Key Investors:

OpenAI has raised significant funding from a wide range of institutional investors. Some of the notable investors include:

Microsoft – One of OpenAI’s largest backers, providing cloud infrastructure via Azure.

ALTIMETER CAPITAL MANAGEMENT LLC Altimeter Capital Management – Venture capital firm involved in various rounds.

富达 Fidelity Investments – Major institutional investor.

Nvidia – Technology giant and key supplier of AI hardware.

SoftBank Group – Holding company known for large tech investments.

A.Capital Ventures – Early-stage venture capital firm.

These investors reflect a strong interest from both technology companies and venture capitalists in OpenAI’s potential to lead the AI sector.

Board Team:

The Board of Directors includes high-profile individuals from diverse industries, reflecting the company's global impact and strategic direction:

Bret Taylor – Chair of the Board. Former Co-CEO of Salesforce and technology leader.

Sam Altman – CEO and Co-Founder of OpenAI, reappointed after board restructuring.

Adam D'Angelo – CEO of Quora and long-time board member.

Larry Summers – Former U.S. Treasury Secretary, bringing deep governance and economic expertise.

Dr. Sue Desmond-Hellmann – Former CEO of the Bill & Melinda Gates Foundation, with a strong background in medical innovation.

Nicole Seligman – Former EVP and General Counsel at Sony, currently serving on several corporate boards.

Fidji Simo – CEO of Instacart and former executive at Facebook, with experience leading consumer tech.

Executive Team (C-Team):

The executive team consists of highly experienced leaders with a mix of technology, business, and research backgrounds:

Sam Altman – CEO and Co-Founder of OpenAI, instrumental in the company’s direction and mission to develop AGI.

Greg Brockman – Co-Founder, President, and Chairman, with a strong focus on both technical and strategic roles.

Brad Lightcap – Chief Operating Officer, overseeing the company’s growth, operations, and the OpenAI Startup Fund.

Mira Murati – Chief Technology Officer, leading product development, research, and partnerships.

Sarah Friar – Chief Financial Officer, joining recently from Nextdoor, focused on scaling OpenAI’s financial structure. (Fun to see that Sarah is the CFO - we worked together at Andersen back in the day!)

This team, coupled with OpenAI’s world-class talent, is poised to lead the company through its aggressive growth trajectory while pushing the boundaries of AI technology.