OpenAI: Embracing a For-Profit Future to Fuel AI Progress

OpenAI, the pioneering AI research and deployment company, has been making waves in the tech industry with its groundbreaking advancements in artificial intelligence. However, the company's unique structure, a partnership between a nonprofit and a capped-profit arm, has raised questions about its long-term sustainability and ability to raise capital. In a recent blog post, OpenAI has laid out its plans to transition to a for-profit structure, aiming to balance shareholder interests, stakeholder interests, and a public benefit interest in its decision-making. This move is set to significantly enhance OpenAI's ability to raise capital and attract investors, enabling it to continue pursuing its mission of building artificial general intelligence (AGI) that benefits all of humanity.



The bull case for OpenAI's for-profit transition

OpenAI's decision to transition to a for-profit structure is a strategic move that addresses several challenges the company has faced in recent years. By embracing this new model, OpenAI is poised to:

1. Raise more capital: The for-profit structure will allow OpenAI to raise more capital than initially imagined, as investors are now willing to back the company but require conventional equity and less structural bespokeness (OpenAI, 2024). This shift will enable OpenAI to compete with other AI companies that are investing hundreds of billions of dollars into AI development, ensuring that OpenAI can continue pursuing its mission.
2. Attract investors: By adopting a for-profit structure, OpenAI will be better positioned to attract investors who seek conventional equity and less structural complexity. This change will make OpenAI a more appealing investment opportunity, as it will align with the expectations and preferences of traditional investors.
3. Balance interests: The Public Benefit Corporation (PBC) structure requires OpenAI to balance shareholder interests, stakeholder interests, and a public benefit interest in its decision-making. This balance will ensure that the company's commercial operations align with its public benefit mission, preventing conflicts of interest between the PBC's commercial operations and its public benefit initiatives.



Potential revenue streams and cost structures under the new for-profit structure

Based on OpenAI's internal financial projections, the new for-profit structure is expected to have the following potential revenue streams and cost structures:

1. Revenue Streams:
* ChatGPT: OpenAI expects ChatGPT to remain its primary source of revenue, significantly outpacing API sales to developers. The company's strategy includes potential price increases for ChatGPT, with costs possibly doubling by 2029 (The Information, 2024).
* New Products:
+ Video Generation: OpenAI plans to enter the AI-generated visual content market, which could generate nearly $2 billion in revenue by late 2025 (The Information, 2024).
+ Robotics Software: OpenAI is targeting the physical automation sector with robotics software, which could open new avenues for commercial applications (The Information, 2024).
+ SearchGPT: OpenAI is developing a product called SearchGPT, which is planned to be integrated directly into ChatGPT, potentially transforming it into a more comprehensive information retrieval system (The Information, 2024).
2. Cost Structures:
* AI Model Development and Operation: 60-80% of spending is expected to go towards training and running AI models. For 2026, the company projects $10 billion in training costs and an additional $5 billion for research (The Information, 2024).
* Personnel Costs: Projected to increase from $700 million in 2024 to $2 billion in 2025, reflecting the competitive market for AI talent (The Information, 2024).
* Data Costs: OpenAI expects its data costs to decline, indicating improving efficiency in data utilization or growing self-sufficiency in data generation (The Information, 2024).

These revenue streams and cost structures are based on OpenAI's internal financial projections, which aim to increase annual revenue from $1 billion in 2023 to $100 billion by 2029, while not expecting to turn a profit until 2029 (The Information, 2024).

Addressing potential concerns and challenges

While OpenAI's for-profit transition holds significant promise, there are also potential concerns and challenges that the company must address:

1. Elon Musk's opposition: One of OpenAI's co-founders, billionaire Elon Musk, has filed for an injunction to halt the company's transition to a for-profit, accusing OpenAI of abandoning its original philanthropic mission (OpenAI, 2024). OpenAI has called Musk's complaints "baseless" and simply a case of sour grapes (OpenAI, 2024). The company will need to navigate this legal challenge and address Musk's concerns to move forward with its transition.
2. Meta's opposition: Facebook's parent company, Meta, is also supporting efforts to block OpenAI's conversion from a nonprofit organization into a for-profit one. In December, Meta sent a letter to California Attorney General Rob Bonta, arguing that allowing the shift would have "seismic implications for Silicon Valley" (OpenAI, 2024). OpenAI will need to address Meta's concerns and work with regulators to ensure a smooth transition.
3. Maintaining the public benefit mission: As OpenAI transitions to a for-profit structure, it must ensure that its commercial operations align with its public benefit mission. By balancing shareholder interests, stakeholder interests, and a public benefit interest in its decision-making, OpenAI can maintain its commitment to building AGI that benefits all of humanity.



Valuation and key takeaways

At current share prices near $14, 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 decision to transition to a for-profit structure is a strategic move that addresses several challenges the company has faced in recent years. By embracing this new model, OpenAI is poised to raise more capital, attract investors, and balance the interests of shareholders, stakeholders, and the public benefit. As the company navigates potential concerns and challenges, it remains committed to its mission of building artificial general intelligence that benefits all of humanity. With a strong bull case and a promising outlook, OpenAI is an attractive investment opportunity for those willing to take a risk at such a low price today.