OpenAI Is Going Public But Is It for the Wrong Reasons?

The AI sector is about to get even bigger.

According to several media reports, OpenAI, the ChatGPT creator is aiming to file confidentially for an IPO in the coming weeks with the goal of going public as soon as September.

The news comes as another blockbuster IPO, SpaceX, is headed for the public markets. Elon Musk's space exploration is set to go public as soon as June after filing confidentially in April.

OpenAI's offering is likely to attract a ton of attention as the company itself kicked off the AI boom and remains, arguably, the leader today. It's forged close relationships with many of the top chipmakers like Nvidia and AMD, and Nvidia and several other top tech companies own stakes in the start-up.

It's too soon to judge OpenAI's IPO prospects, as we don't know its key financial information, but the timing of the offering gives us some clues into how it will do.

Image source: Getty Images.

Where OpenAI is today

OpenAI's decision to go public comes as Anthropic, the AI start-up that owns the chatbot Claude, has gone from an underdog in the AI race a couple of years ago to arguably the leader.

Anthropic is currently in talks to raise new funding at a valuation between $900 billion and $950 billion, which would make it more valuable than OpenAI, which was valued at $852 billion in its last funding round in March.

In addition to Anthropic's valuation topping OpenAI's, Anthropic also seems to be the faster-growing of the two. Anthropic's revenue is expected to more than double from $4.8 billion in the first quarter to $10.9 billion in the second quarter. OpenAI, on the other hand, reached annualized revenue of $25 billion in March, up 17% from the beginning of the year. If that growth rate has continued, Anthropic would be the bigger of the two companies based on second-quarter revenue.

In addition to OpenAI falling behind Anthropic, the company is also facing a significant cash crunch, as it is spending heavily on the tech infrastructure required to run its AI models. In April, The Wall Street Journal reported that OpenAI had missed key revenue and user targets, and it may struggle to pay for its data center commitments if it doesn't grow fast enough.

OpenAI now has roughly $600 billion in future spending commitments, and the company itself has forecast cash flow losses until 2030. Estimates for its cumulative cash burn vary, but they are into the hundreds of billions of dollars.

Why OpenAI is going public now

Companies can go public from a position of strength or weakness. OpenAI remains a juggernaut, but the company finds itself in a vulnerable position, losing market share to Anthropic and burning through cash as it seeks to carry out its business plan.

That seems to explain why OpenAI is going public now. The business needs cash. The valuation seems unlikely to move significantly higher in the private markets, at least without its technology surging past Anthropic, and investors and insiders need an exit strategy.

We can't fully judge OpenAI's prospects with more financial information, but the decision to go public seems like it was forced on the company by industry circumstances and its own cash burn.

That's a bad sign for an IPO that is likely to be valued at $1 trillion or more.

OpenAI could become an enviable growth story again, but four years is a long time to wait for positive free cash flow. Based on what we know about OpenAI currently, investors are better off passing on the IPO.

Jeremy Bowman has positions in Advanced Micro Devices and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.