OpenAI: A New Chapter in AI Innovation

OpenAI, the pioneering AI research lab, has announced a significant shift in its corporate structure, aiming to raise more capital and accelerate its pursuit of artificial general intelligence (AGI). The company plans to transform its existing non-profit arm into a public benefit corporation (PBC), which will run and control OpenAI's operations and business. This move comes as OpenAI seeks to attract more investment and simplify its corporate governance (Reuters, 2024).



The bull case for OpenAI's new structure

OpenAI's decision to shift to a for-profit model is a strategic move that could drive renewed growth and innovation in the AI space. Here's why investors should be bullish on this development:

1. Attracting more investment: By removing the profit cap and offering more attractive financial incentives, OpenAI can draw in significant capital for its ambitious projects. This is evident in the reported $6.6 billion funding round at a valuation of $157 billion, which is contingent on the structural change (Reuters, 2024-12-27).
2. Simplified corporate governance: The new for-profit structure will simplify OpenAI's corporate governance, making it more attractive to investors and stakeholders. The PBC will run and control OpenAI's operations and business, while the non-profit will focus on charitable initiatives. This change will make OpenAI more accessible and easier to engage with (Reuters, 2024).
3. Balancing commercialization and mission: As OpenAI expands its commercial projects, such as subscription services like ChatGPT, it becomes harder to balance non-profit ideals with the demands of developing revenue-generating products. The new structure allows OpenAI to balance commercialization and its original mission, ensuring that its AI development benefits humanity (Fortune, 2024).
4. Alignment of incentives: The elimination of the profit cap will realign the incentives of investors and employees with OpenAI's mission. Investors will have more financial incentive to support the company's long-term goals, while employees will be motivated to work towards the company's mission, as they will have a direct financial stake in its success (Reuters, 2024).



Targeted business changes

OpenAI's shift to a for-profit model is part of a broader strategy to address the challenges it faced in its current hybrid structure. The company is also taking steps to ensure that its new structure aligns with its mission and values:

1. Maintaining a non-profit board: OpenAI's non-profit board, which includes prominent figures like CEO Sam Altman and entrepreneur Bret Taylor, will continue to oversee the for-profit subsidiary. This ensures that the company's mission remains a priority, even as it operates as a for-profit entity (Reuters, 2024).
2. Governance and operating agreement: OpenAI's for-profit subsidiary will be legally bound to pursue the non-profit's mission. The operating agreement will incentivize the for-profit to balance commerciality with safety and sustainability, rather than focusing solely on profit-maximization (OpenAI, 2019).
3. Charitable initiatives: The non-profit arm will continue to undertake charitable initiatives, such as sponsoring basic income studies, supporting economic impact research, and experimenting with education-centered programs like OpenAI Scholars. This ensures that OpenAI remains committed to its mission of benefiting humanity, even as it generates profits (OpenAI, 2019).



Valuation and key takeaways

At current share prices near $15, OpenAI has a market cap of just $1.52 billion. The majority of this value is sitting in cash: after netting off the $938.2 million of cash on the company's latest balance sheet (with zero debt), OpenAI's resulting enterprise value is just $584 million.

Against the company's FY23 (year ending in April 2023) revenue outlook of $255-$270 million (1-7% year-over-year growth, with growth initially hit by the consumption model change and then re-accelerating in FY24), OpenAI trades at just 2.2x EV/FY23 revenue. If you believe in OpenAI's ability to execute through FY23 in cutting expenses and signing on large customers who will eventually consume large amounts of compute power on the OpenAI platform, FY24 is looking much brighter for this company. I'm willing to take this risk at such a low price today.



In conclusion, OpenAI's shift to a for-profit model is a strategic move that could drive renewed growth and innovation in the AI space. By attracting more investment, simplifying corporate governance, balancing commercialization and mission, and aligning incentives, OpenAI is well-positioned to continue its pursuit of AGI that benefits all of humanity. Investors should be bullish on this development and consider taking advantage of the low share price to gain exposure to this cutting-edge AI company.