Missed It By That Much
Some of my loyal readers may remember the 1965 television comedy, Get Smart, starring Don Adams as the bumbling Secret Agent #86, working for CONTROL, a secret U.S. government counterintelligence agency based in Washington. “Missed it by That Much” was a famous reply of Agent #86 when he was making excuses to his Chief. I thought of that remark when the financial news broke this past week (reported by the Financial Times) that OpenAI’s annualized revenue miss was a “mere” $20 billion less than has been previously signaled just one month ago. This is a massive gap, and many financial analysts are saying that it is likely to dampen optimism about the growth of AI demand.
However, some analysts are even more bearish and are in what I would call “the sky is falling” camp, calling it a “shell game,” because all the big players are lending back and forth to each other. One analyst even claims that Open AI has $1.5 trillion in circular financing, and pontificates that with revenue much smaller than expected, it will be much harder for it to pay off all the loans this leveraged company has taken on.
The revenue miss is not the only swing and a miss by Open AI CEO Sam Altman. He founded the company, along with Elon Musk, as a nonprofit organization with the mission to develop artificial intelligence for the benefit of humanity. That didn’t last long! In 2019, OpenAI created a for-profit subsidiary; and in June of this year, OpenAI filed a filed a draft S-1 registration statement with the U.S. Securities and Exchange Commission, as the first formal step toward a public offering. Currently, prediction markets are suggesting a likely IPO valuation in a range between $1.25 trillion and $1.5 trillion. That’s a lot of moolah for what once was a non-profit.
One of Altman’s competitors thinks it could get an even greater amount. Anthropic is pursuing an IPO in 2027 that many expect to value the five-year-old company at approximately $2 trillion. That huge valuation doesn’t come without great risk, for the initial prospectus for the IPO says that Anthropic’s AI models could pose a “catastrophic or existential risk to humanity. In fact, A top safety researcher at Anthropic has warned AI is advancing so quickly, that he believes there is a greater than 10% chance it "could kill all humans" within the next decade. Sam Altman has seemed to agree, for he also has said the technology underpinning his company’s most famous product could bring about the end of human civilization.
When the news of the Existential Threat to Humanity hit the public airways, these two powerful AI companies tried to walk back the risks, and they have begun to lobby to have more government regulation and oversight. Altman now says that he would prioritize “safety and valuation considerations” in selecting a date for his IPO. However, despite the risks, and his avowed concern for safety, he still wants to go forward, saying “we believe that the world should accept some bad things happening for the benefits of this technology.”
I know of one powerful group that would vehemently disagree that the “world should accept some bad things.” I see advertisements for various members of that group all the time while driving on the highways or seeing their incessant ads on TV commercials. The powerful members of that group are personal injury lawyers, and they will definitely target these new Trillion-dollar companies. They won’t miss their target, not even as what Maxwell Smart would say – “not by that much!”
That’s one reason I think these companies are running into the arms of government regulations. They want protection from lawsuits, and not so incidentally, that protection would also help them fight off competition from new start-up companies here in the United States, and from other country run businesses like those is in China.
In sum, I would be careful about investing in these companies. They seem to be rushing forward into an unknown world. Financially speaking, their estimated revenue growth may be too much “pie in the sky,” and they may be borrowing too much money. In addition, the lawsuit risk could eat up all the actual profits that remain. What will these companies do about “the existential risk to humanity?” It is all absolutely frightening.
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