Investor Intentions of Locating the Next “OpenAI” Completely Overlook the Obvious Choice.

With the goal of securing a foothold in the artificial intelligence equity gold-rush, investors are scouring the globe to suit their investment bias.

Individual equity holders, below the capitalization of significant institutional investors, cannot directly invest in OpenAI until the time arrives that the company opts to go public with a listing. So, most look for equity investments, already in the public arena, perhaps offering a competing artificial intelligence product, or that will incorporate OpenAI products in their own software suites, or that intend to integrate/ally with OpenAI through the offer of ancillary services, at some indeterminate time in the future.

This is likely a fool’s errand.

The artificial intelligence market, as previously noted, already is carved up and distributed among mega-cap companies. This is due to the enormous front-ended investment needed to participate in this tech sector. Trillions of dollars are being spent on data centers, trillions on chip orders over the coming five years.

Trillions, not billions, not tens of billions; and these are nothing more than componentry for the artificial intelligence proposition. The true cost of capturing the brass ring, the AI itself, will almost certainly be expressed by magnitudes of hardware expenditures.

Such upfront capital costs leave companies with market caps in the billions, the tens of billions, even the low $100s of billions of dollars, without a viable path to meaningfully participate. Those holding publicly traded companies with market caps in the billions, the tens of billions, or the low hundreds of billions (sub $300 billion) that claim to have an edge, or for that matter, even some sort of participation in the front end of the AI race are either deluding themselves, or being “hyped” down the garden path by others promoting their own equity book. There is no such thing as small cap AI, mid cap AI, or smallish large cap AI. Given the private funding rounds and the institutional equity participation on equity rounds in AI, there is ONLY mega-cap ownership of viable names in the space.

No leading European AI offering exists, no cutting edge Australian AI is out there, no important UK AI is chomping at the bit to gather revenues, no Canadian domestically produced AI exists commercially, no impressive Indian AI offering is building global momentum. Other than Chinese AI, which is, almost without doubt, fully linked to the CCP espionage ops as a source of data mining for domestic benefit and is almost certainly pirated off of earlier, open sourced versions of OpenAI; no, the only important, marketable AI suites are created, marketed and turning to revenue from American led artificial intelligence firms.

And with artificial intelligence, either you lead, or you are not viable. Piracy of previous gen source code is neither leading nor cutting edge, it is just repackaging of stale-dated software. If artificial intelligence represents a modern day version of a space race, knowledgeable active institutional investors have too much money at stake, and are not gullible enough, to invest in a fake moon landing.

The sector appears, increasingly, to offer the potential for a “winner take all” proposition.

The reward would then come in the form of monopoly status margins; and not just any old regulatory monopoly margin with growth caps, but rather, secular trend, free market monopoly status technology margins earned through innovation and demand, not via government edict.

https://www.nasdaq.com/articles/openai-msft-revenue-doubles-10-billion-ai-adoption-accelerates

So, until OpenAI becomes a public company, what is an intrepid investor to do?

By October 2024, Microsoft had stumped up more than $14 billion in net private funding for OpenAI and OpenAI, at that time, was appraised as having a private market value in the range of $150 billion. The monies Microsoft advanced to OpenAI were not considered, at that time, to be an equity investment. This is largely due to the fact that OpenAI, at that time, was not deemed to be a for-profit company. However, the recent change of OpenAI from a not-for-profit enterprise, to one with a for-profit division, has allowed for Microsoft and OpenAI to begin the negotiations on the conversion of monies previously advanced by Microsoft into an equity stake. A simple dollar for dollar conversion of the advances into equity, based upon the private market estimates, suggest that Microsoft could beneficially own about 9%-10% of OpenAI on an if/as/when issued basis. That presumes Microsoft continues to fund further advances to OpenAI on a pro-rata basis.

Microsoft also has meaningful stakes in other, privately held AI models up and down the food chain. The company is operating as not just the world’s largest software company, MSFT is THE go-to publicly traded incubator of data based and information based tech. And for those of us who believe otherwise, where is our $3.5 trillion of market capitalization to back up a rebuttal?

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Any potential public flotation of OpenAI will crystalize the value of the Microsoft funding for MSFT equity investors.

Valuations will then reflect the equity pricing and percentage ownership by Microsoft of the world’s largest artificial intelligence platform.

If will also end the modest accounting drain on the profits of Microsoft, as MSFT does not indicate an equity interest in OpenAI, but does record a percentage of loss reported at OpenAI in quarterly financial reports.

Presently, Microsoft is the world’s largest company by market cap, and that valuation may, or may not adequately reflect, a unknown “warrant” on the valuation of OpenAI.

Perhaps Microsoft will choose to acquire all of OpenAI in its own right, so as to preemptively prevent a third party takeover. MSFT is the largest customer of OpenAI. OpenAI is reliant upon Microsoft for data storage. While other private funders might disagree, it is a symbiotic relationship.

The cost to fully acquire OpenAI, once publicly floated, will likely be staggering. A takeover premium, above the private pricing today, would value OpenAI above $500 billion. Microsoft will not be at all happy to have a competitor own a controlling interest in the artificial intelligence firm and MSFT are one of the few companies, globally, with the capital at hand, to subsume and integrate such an important business.