Since the release of ChatGPT in November 2022, the value of its parent company, OpenAI, has seen remarkable growth. In January 2023, OpenAI, the startup owned in large part (49%) by Microsoft Corporation (MSFT), was valued at $29 billion. However, its current private market valuation is estimated to have surged to approximately $80 to $90 billion, marking a roughly threefold increase in value. This rise in valuation can be explained by multiple factors. OpenAI has been successful in the generation of much larger revenues in 2023, with more and more businesses adopting the technologies behind ChatGPT and ChatGPT-4. This development has heightened investors’ expectations for future growth. The outlook for 2024 seems quite promising, as the startup expects to generate many more billions of revenues during that year.
Also, a potential employee share sale of the company to outside investors in the form of a tender offer contributes to the increased valuation that we’re seeing right now. In short, a tender offer, or a third-party tender offer in the case of OpenAI, is a type of transaction where employees get to sell their shares to external investors at a price premium. This is a win-win situation between the employees and the company since the employees get to cash out on their investments while the company gets to feel the market for future fundraising events without having to issue more shares, which would dilute ownership. Therefore, since OpenAI is testing the market and tender offers tend to happen before initial public offerings (IPOs), the investor sentiment points towards a narrative where OpenAI might also be looking to proceed to an IPO in the coming months, with its newly updated valuation working in its favor.
OpenAI, co-founded by Sam Altman and Elon Musk in 2015, is an AI organization that transitioned from a nonprofit to a capped-profit model in 2019 to secure funding, including a $1 billion investment from Microsoft. It competes with tech giants by offering stakes to employees. OpenAI developed GPT-3, a sophisticated language model, and DALL-E, an image generation model. In December 2022, it released the viral ChatGPT chatbot, hitting 1 million users in 5 days.
More recently, in January 2023, Microsoft invested $10 billion in OpenAI with the purpose of integrating its technology into its own systems like Bing, office, outlook, etc. Finally, in March 2023, Open AI announced GPT 4 using a paid subscription model, a chatbot with more powerful training on a bigger database and the ability to interpret images.
The competition to gain control over the AI industry is getting more and more intense as big tech companies such as Google and Amazon are making substantial investments to compete with Microsoft in this sphere. Two prominent rivals of OpenAI in this space are Anthropic and Bard.
Anthropic, a nonprofit organization, was founded by former members of Open AI who disagreed with the new strategic operations due to Microsoft’s investment in the company. Anthropic is primarily focused on AI safety research. The recent investments from Google (GOOG) and Amazon (AMZN) valued the company at approximately $5 billion.
Bard, on the other hand, is a more controversial artificial intelligence technology. In fact, Google’s market valuation dropped by $100 billion following Bard’s launch in February. The chatbot encountered some mistakes in its beginning and investors perceived it negatively. However, Google remained committed to its investment in Bard.
Considering OpenAI's recent valuation at approximately $80 to $90 billion, OpenAI could benefit from important funding going public, helping the company propel itself in the artificial intelligence race. Investor expectations are notably positive, making it possible for the company to issue shares at a premium price.
The AI legal landscape is evolving; investors must be cautious if the company IPOs, as new laws could disrupt operations. Early industry growth also presents the risk of competitors gaining market share.
In a somewhat parallel development, Reddit, a popular social news and discussion platform has expressed intent to benefit from the present bullish narrative surrounding AI.
Reddit, unlike OpenAI, has formerly announced intent to public, dating from its filing of a confidential public offering in December 2021 an intent which it has reiterated with its CEO Steve Huffman’s announcement of a late 2023 target for IPO back in February 2023 . However, it seems like a significant estimated drop in valuation since its last funding round in 2021 (41%), bringing its estimated valuation at 6.6$B per Fidelity , has temporarily shelved the project. The news and forum platform was negatively affected by an unfavorable macro environment and its inability to reach profitability in year 18 of operations reportedly had a 15B$ target, a much higher bar than what it would likely fetch presently.
While these developments might seem unrelated to AI technology, Reddit CEO Steve Huffman seems to have found in AI a possible opportunity to bump up Reddit’s valuation. To provide some context, Reddit's interrelation with OpenAI and its competitors stems from the latter’s use of Reddit’s extensive conversation data as training fodder for LLMs (Large Language Models) employed by OpenAI and the likes in AI training such as with ChatGPT-3 and 4. As of now, the data stored and available freely through Reddit’s API has been a rather cheap and viable training source for AI, as Reddit’s extensive conversation data is highly valuable and distinctive in both its breadth and depth of information.
The impact of monetizing APIs like Reddit's on AI development is uncertain. Some investors think existing free data is enough for short-term AI progress, suggesting limited pricing power for Reddit's API. However, AI thrives on fresh data, and monetization may negatively affect long-term finances and valuations for companies like Reddit and OpenAI.
The launch of ChatGPT has had a significant impact on its parent company, OpenAI, leading to a threefold increase in its market value. This growth is driven by a positive outlook on AI and higher revenue expectations. Despite being a leader in the industry, the race to dominate AI is heating up, with major players such as Google and Amazon pouring substantial investments into the field. With AI widely used by humans for tasks like information retrieval and image generation, companies are eager to incorporate AI technology into their operations. Additionally, some organizations are seizing the opportunity presented by the positive AI trend to boost their earnings. For instance, Reddit plans to provide its extensive conversation data to train AI models, anticipating a rise in its revenues and potentially enhancing its market standing.
Capital Markets Team - Equity Research,
Vaibhav Munjal, Pruthvin Batham, Thomas Nycz, Louis-Philippe Gagnon, Étienne Sigouin, Ayden Rathipanya