3. OpenAI's Leadership Shakeup and the $86 Billion Valuation Question

Sam Altman's abrupt dismissal as OpenAI's CEO and the subsequent resignation of Greg Brockman, another co-founder, along with several other senior executives, have sent shockwaves through the tech industry. This upheaval comes at a time when OpenAI is rapidly rolling out new AI functionalities, including the recently launched "App Store," dubbed the "iPhone of Artificial Intelligence."

OpenAI employees and investors have expressed support for Altman, and speculation is mounting about the possibility of his reinstatement as CEO. Such a move would result in a board reshuffle and a shift in control within the company.

The board's reasons for dismissing Altman remain unclear. The official statement states that Sam " was not consistently candid in his communications and lost the trust of the board."

Speculation as to the true reasons behind Altman's ouster includes:

• Altman's alleged attempt to raise up to $100 billion in funding to build a chip factory.
• Disagreements over safety concerns related to the rapid rollout of new AI functionalities.
• Differing opinions on the commercialization of OpenAI's services.
• Altman's involvement in other AI startups.

These developments coincide with the finalization of a "shares tender offer" led by Thrive Capital. The offer involves the sale of OpenAI employee shares (PPUs – Profit Participation Units) that would value the startup at around $86 billion. This would represent a significant increase from OpenAI's April 2022 valuation of $27 billion, following a $10 billion investment from Microsoft. The $86 billion valuation would also be approximately 70 times OpenAI's current revenue.

The tender offer would allow employees to cash out some of their "paper" profits, provide the company with additional capital, and potentially move OpenAI closer to a traditional for-profit structure.

While the valuation is noteworthy, it is not based on the company's historical financials. Instead, the valuation is derived from methods used for much smaller startups, relying heavily on an optimistic view of the future, which, while necessary, also carries a high probability of failure.

OpenAI has indeed experienced an impressive growth, transitioning from effectively zero revenue in early 2022 to a current monthly revenue of around $100 million. Total revenue for 2023 is projected to be around $200 million, and by 2024, it is forecast to reach around $1.2 billion for the year.

While these revenue figures are impressive, so are the costs associated with running OpenAI's platform and training its AI models. In 2023, expenses are expected to approach $300 million, resulting in a net loss of $100 million.

Considering the $10 billion investment received in 2023, it should be assumed that the actual cash burn rate is significantly higher than the projected $100 million and possibly reaching billions.

OpenAI's actual financials are not publicly available, and neither are accurate reports on user numbers. Available information suggests a decreasing number of ChatGPT users, but this may be offset by an increase in API usage by corporate users.

What is clear, however, is that the business environment for OpenAI is becoming increasingly challenging.

AI companies are facing a growing shortage of AI talent and higher employee turnover rates. Additionally, there is a scarcity of enterprise-level GPUs due to rising demand, and an increasing number of alternative platforms offering either cheaper services or greater flexibility.

Despite these challenges, the opportunity for OpenAI remains immense.

Valuation Assumptions

So, what factors would justify an $86 billion valuation?

Let's focus on the terminal value (in 10 years' time) into which the business will grow gradually. This will make up the main part of the current valuation.

Assuming:

• High Revenue Growth: $117 billion, representing a 100x growth from the current level and matching the current revenue of Meta (Facebook's), growing at 3% a year afterward.
• High Profit Margin: Achieving EBIT 30%, a very high level that would require OpenAI to be deeply embedded in its customer operations, effectively building a "moat".
• Low reinvestment needed: Maintaining ROIC of 20% from increasing EBIT in perpetuity.
• Discount rate: 12%
• Risk of default: 10%, reflecting Sam Altman's influence on the future success of the business and the potential impact of his dismissal. Sam has been instrumental in making OpenAI what it is today, but his role is not as central as Elon Musk's in Tesla. Sam's dismissal would likely hurt OpenAI and cause the departure of more key employees, as well as strain relationships with investors.

Supporting a High Valuation

A combination of these highly favourable outcomes in these areas could indeed support an $86 billion valuation.

Acknowledging Uncertainty and Risks

However, it is crucial to acknowledge the inherent uncertainty and potential risks associated with such a high valuation. Only time will tell whether OpenAI can achieve the ambitious growth targets necessary to justify this valuation.