OpenAI – Binary decision

Another $40bn found down the back of the sofa.

• Another $40bn to spend on compute will ensure that OpenAI does not have to become efficient like its Chinese competitors meaning that when the money runs out, it is likely to be caught out resulting in it being forced to sell itself to a rich competitor or one of its backers.
• OpenAI is raising $40bn at a valuation of around $300bn from which $10bn ($7.5bn from SoftBank and $2.5bn from an investor syndicate) is going in now.
• The other $30bn will go in later this year with $22.5bn from SoftBank and $7.4bn from the investor syndicate.
• Almost all of this is likely to be spent on compute as OpenAI continues to make its models bigger, train its models harder and use more data in its quest to create artificial general intelligence (AGI).
• This is the point at which the machines become more intelligent than humans and take over more than 90% of all economically active tasks.
• The assumption being made by OpenAI’s investors is that it will be able to reach AGI before anyone else and do so in a relatively short period of time.
• This would give it exclusive access to arguably the most valuable asset ever created, and assuming that it monetises this asset, a fair valuation in the many trillions of dollars.
• However, there are two caveats:
  • First, No AGI: as RFM research and all of the available evidence suggests that a system that is based on statistical pattern recognition will never be truly intelligent.
  • AGI requires an understanding of causality and the ability to distinguish between relationships that are merely correlated by chance and those where one affects the other.
  • It is this shortcoming that prevents the machines from understanding the causal nature of the tasks that they have been asked to complete and is why they make things up, get things wrong and are generally unreliable.
  • As a result, RFM Research has concluded that the approach that OpenAI is taking will never produce AGI and when this realisation hits the market, the money will dry up and OpenAI will be forcibly acquired.
  • Second, Corporate Governance: OpenAI remains a hot mess of a for-profit entity being governed by a board that is tasked with overseeing the creation of AGI and its distribution to everyone for the benefit of all mankind.
  • There is a large conflict here which very nearly caused the company to completely implode and may well do so again.
  • Furthermore, the rapidly souring relationship between Microsoft and OpenAI means that if conflicts emerge, there is now a large and grumpy shareholder capable of making a lot of trouble.
• The net result is that my view on OpenAI is very binary.
• If one believes that OpenAI will create AGI and do so before anyone else, then SoftBank is making a truly great investment.
• However, if one believes, and as the evidence indicates, that statistical-based systems will never create true intelligence and that the market for models is commoditising, then the real value of OpenAI is far below $300bn and may even be $0.
• The real winner from this investment is CoreWeave whose difficult IPO has its first day of trading today.
• This is because it appears likely that OpenAI will spend a portion of the $40bn on CoreWeave compute services taking up the slack that Microsoft has created by reducing its deal with CoreWeave.
• This will be a badly needed shot in the arm as CoreWeave has had to downsize its offering as well as reduce the valuation from $32bn to $23bn.
• This puts the company on 15x EV / Revenues for 2024 as it has a net debt position of ($6.6bn) which is pretty expensive for a company that provides infrastructure for AI rather than the AI itself.
• However, sentiment has rapidly soured on CoreWeave meaning that if it trades badly on the opening, it could be worth having a look at.
• Alternatively, Nebius which is in a similar business and at an earlier stage of its roll-out (given 2024 revenues of $118m), but has no debt and $2.5bn in net cash may be a much better and safer option.
• This (plus Nvidia and inference and nuclear power) is where I would be much more interested in looking rather than in the hugely valued providers of foundation models which are showing every sign of turning into commodities.