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The problem is that other companies were able to rapidly replicate and sometimes surpass most of what OpenAI have. It costs millions of dollars to do it, but that’s less than the billions of OpenAIs market cap. In terms of product / ecosystem / IP moat, I would argue the incumbent tech companies are in a better place to deploy these models. Will you use OpenAI when AWS can serve a model that’s good enough and they have already gone through procurement and billing? Will you visit the OpenAI page if Apple are able to integrate chat into your OS?

The tech is real but OpenAI wins as part of Microsoft IMO.

I agree. There are a lot of unknowns in OpenAI. I don't own any private OpenAI shares.

My investment strategy is linked in my original post.

I think the expectation is that as companies begin drawing moats around their data, it will be harder for new players to enter the market. As these models progress, it will just get more expensive to compete, so only the big players will have a shot. OpenAI might only have a slight advantage at the moment, but they have proven they can do it, they have the talent necessary to continue to innovate, and some great backers, including the government through Larry Summers. All they need is a boatload of money, and that's exactly what they are getting through their huge valuation.

I have no idea if that reasoning is sound, but it is at least plausible. I've compared most of the big LLMs, and OpenAI still has a really solid lead imo., mostly due to tooling. But I also suspect they are very close to GPT5, but will wait to release it until they have serious competition, eg. through Gemini.

Yes. This article demonstrates the problem of trying to reason by simple earning analysis alone. You can have to consider the dynamics of the businesses involved.

OpenAI being worth $100B doesn’t seem ridiculous at all to me. There is a lot of risk investing in such a stock, but given it has gone from nowhere to over $1B in revenue in such a short time, and it has a very strong brand position, is partnered with one of the best run tech companies, has a unique training pipeline, has fantastic connections to important institutions, is the first mover, and has an array of impressive products, you would expect that 1B to easily reach 10B, and reaching revenue of 100B doesn’t seem far fetched.

Taking another analysis: if they manage to charge $50 per business user, which isn’t too far from current charges and not that different from say what Microsoft costs, and is a small amount to recoup in productivity gains, then they need 150 million or so users. Office has double that. And of course we can see many other revenue sources, like education.

Their biggest challenge will be competition, and that makes it highly uncertain. It’s a very _risky_ stock, but the potential upside is very high. It is not a bubble if the price is driven by expectations of earnings growth.

>Their biggest challenge will be competition, and that makes it highly uncertain. It’s a very _risky_ stock, but the potential upside is very high. It is not a bubble if the price is driven by expectations of earnings growth.

OpenAI isn't a stock. It's a private valuation.

I actually think they'd be well above $100b if they're a public company right now. Just look at how much $MS added in market cap since ChatGPT.

MS growth has been driven by multiple factors.

Lost me at why OpenAI not being floated makes any difference to my analysis?

>Lost me at why OpenAI not being floated makes any difference to my analysis?

Nothing really. I just wanted to point out that it's not a stock. It's a private company still.

Doesn't change your analysis.

I am the writer of the article.

I do consider the dynamics of the businesses involved - when I Write about a single company I consider it very deeply, when I write about a basket of stocks, I adjust my message to provide for that. I have written tons about differentiating between business models, and have spoken about that on my recent podcast interview with Value Hive.

To get to the punch, Open AI being valued at $100bln may not be ridiculous to you, but it is to me. What is your risk/reward? Abysmal. Even if you hit your targets, no biggie.

I have written about Duolingo, which was (and is) considered extremely overvalued, and similarly has a complicated business model. I broke down my rationalisation in this essay here: https://www.philoinvestor.com/p/duolingo-platformizing-learn...

What insider information/expertise do you have to say OpenAI valued at $100b is ridiculous?

Do you have their financial information? Growth rate? Roadmap? Customer pipeline? Have you tested GPT5? Are you a leading AI expert? Have you worked at OpenAI before?

I'm not saying that you're wrong. It's just silly to say its valuation is ridiculous when it's a private company.

We know Open AI ARR, competitive landscape, the reason why they raised the capital at that valuation (MSFT's goals). We also know that they DO NOT make money, which isn't great considering that there's a bunch of other competitors ramping up to compete with Open AI.

We also know that this is an incredibly dynamic sector/business, which means there's a high chance Open AI may not even get close to achieving its objectives.

Roadmap is one thing, how you value it is another. No, far from a leading AI expert, but I don't need to be a leading AI expert to think.

Do I need to work at Open AI to make an assessment of the company's current valuation? Come on now...if you've been an investor for long enough you know that employees very rarely have a good understanding of the company they work at.

Whether private or public, I have used limited information to make an assessment of the $100bln valuation, and yes for me, it's ridiculous.

I do appreciate your feedback however and constructive criticism.

Re: OpenAI, being "transformative" doesn't necessarily mean being worth a lot. Do you think OpenAI can hold their (so far) unchecked monopoly in such a hot market? Can they 10x their current customer base? If inference cost falls, wouldn't they have to lower their prices to compete with others? And as open source models continue to improve, might companies opt for local, slightly-less-powerful models that save them hundreds of thousands?

I don't know. I don't think the author knows too.

See my other post on how I'm investing.

I am the writer of the article.

First point, being transformative doesn't mean making money. Absolutely, that is a massive layer that people seem to completely miss. (Blind spot?)

As for OpenAI's monopoly - no I don't think they can keep it. Everyone and their grandma is trying to raise funding for LLMs and chatbots. What is the bottleneck or moat keeping OpenAI immune from competition? Not much.

For the last point - yes, at some point LLMs could become local and change everything. The space is so dynamic, virtually guaranteeing that everyone will become unseated over a long enough period of time.

Personally, I don't care about OpenAI's valuation. It's a private company. Who knows what's on their roadmap? For all we know, they're closer to AGI than anyone else and GPT5 is a huge leap in performance and cost, which would make $100b a bargain.

Trying to valuate a private company with little to no information is pointless.

> You have way less transformative companies being valued north of $100b.

Transformative maybe, but valuation shouldn't be about transformative, it should be about profitable. This is a lot more doubtful.

>Transformative maybe, but valuation shouldn't be about transformative, it should be about profitable.

My assumption is that LLMs would be ubiquitous right now, just GPT4, not even GPT5, if inference cost is low enough.

Therefore, I expect the market for LLMs to expand exponentially in the future once inference cost is solved.

exponentially

Ok.. and? Why would that translate to these kinds of valuations? The open source models seem pretty close behind. Close enough to wipe out a huge chunk of any potential valuation at the very least.

>Ok.. and? Why would that translate to these kinds of valuations?

I don't know. No one knows. It's just a thought. They could be on the verge of GPT5 and will continue to dominate for years to come? They have developed an extremely cost effective LLM delivery platform that open source can't compete against? They have a huge backlog of customers that they can't serve yet because of AI chip shortage?

Well that's pretty much the definition of a bubble right there.

It's about future profitability, though. That's speculative, of course, but that's why the growth rate matters.

Sure. That's why it's (arguably) a bubble: it's speculation about the future.

But the pattern of history is pretty clear on this: it's not the first movers that capture the value. In this specific case the value seems to be captured quite well by open source models too.

You are right about the inference cost. The real economic value-adding tasks (for example replacing a whole team of developers with a technical product manager plus AI code generation) are already almost feasible (enough to see what the future will bring), but severely constrained by context limitations, processing speed and ease of integration into development workflows. Since both computing power and clever algorithms can be brought to bear on it, it will prove to be a situation featuring a Moore's law with a very short doubling time.

I agree.

I spent Christmas playing around with the GPT4 API. I quickly discovered many ideas on how to use it. But many of my ideas depended on much lower inference cost and much higher context sizes.

I equate this problem to the cost of loading a website in 1996 vs 2024. My wild guess is that we are probably in 1997 right now.

Therefore, I concluded that not only would LLMs be ubiquitous in the future, I should invest in companies trying to solve the inference cost problem right now.

"You can argue that OpenAI might not hold the lead. That's fine. But the author also argued against Nvidia. Nvidia doesn't care if OpenAI loses the lead because the next LLM lab also uses Nvidia"

You are missing the point here.

Yes, your point is that Nvidia is overvalued because of AI hype and that its financials looks priced for future growth instead of value. I asked ChatGPT to summarize the article for me.

So wait, Nvidia isn't overvalued?