Here are three stories that caught our eye this week:
1) AI Narrative Alive & Well
“What were you thinking?”
That was Scott McNealy — former CEO of Sun Microsystems — who opined on investor ebullience during the dot-com bubble. McNealy went on to say:
“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”
Keep that in mind as we cut to the Wall Street Journal on OpenAI’s new funding round (emphasis added):
“A United Arab Emirates state-backed company is in talks to invest in OpenAI as part of a multibillion-dollar fundraising round for the startup behind ChatGPT.
MGX, which the U.A.E. created earlier this year to invest in artificial-intelligence projects, hasn’t determined the size of a potential investment in OpenAI, according to people with knowledge of the discussions.
If the investment is completed, it would bring the Middle Eastern nation closer to one of the world’s leading AI companies and one of the most valuable private startups in the U.S.
OpenAI is in talks to raise as much as $6.5 billion in a funding round that would value it at $150 billion, according to people familiar with the matter. The investment terms are still being completed, the people said. If the startup ends up valued at $150 billion, that would nearly double its $86 billion valuation last year—a sign of continued investor enthusiasm for the potential of generative AI and OpenAI’s leading role in the space.”
OpenAI generated just over $4 billion in revenue last year.
So investors are valuing OpenAI at 37.5x sales.
No, OpenAI isn’t profitable either. So today’s investors are making a bet 4x bigger than those who bet on Sun Microsystems back in 2000.
Think the AI narrative is alive and well?
Sure seems like it.
Will those investors make money?
We’ll find out.
But that isn’t a bet we’d be making today.
2) Intel Becomes A Forced Seller
But beggars can’t be choosers.
Forced sellers can’t dictate terms. They have to sell for pennies on the dollar.
Like an addicted gambler forced to sell his family heirloom at the pawn shop.
This is where Intel finds itself.
Intel is struggling so badly, it’s exploring selling off pieces of everything it owns.
Source: Bloomberg
Intel lost $1.61 billion last quarter. Analysts expect them to lose more money the rest of the fiscal year. Which forces Intel to the table as a seller.
From Bloomberg (emphasis added):
“Intel Corp. is considering options for its stake in its struggling automated driving systems provider Mobileye Global Inc. as part of a major strategy overhaul, people with knowledge of the matter said. Shares of Mobileye fell to a record low.
The chipmaker could offload some of its 88% holding in Mobileye on the public market or via a sale to a third party, according to the people, who asked not to be identified because the information was private. Mobileye has a board meeting later this month in New York, where Intel’s plans will be considered, one of the people said.
Mobileye shares fell as much as 9.3% to $11.45 after trading opened on Friday, reaching their lowest level since the Jerusalem-based company went public via a US initial public offering in 2022.
Founded in 1999, Mobileye provides software and hardware for self-driving systems. Intel already sold part of its stake in Mobileye last year, raising about $1.5 billion from the deal.
If Intel pushes ahead with trying to raise money using more of its holding in Mobileye, it will be doing it at a difficult time. Mobileye’s stock was down about 71% this year through Thursday, leaving it with a market value of roughly $10.2 billion…
Intel is separately exploring options for its enterprise networking division, the people said. The business, which is called Network and Edge and manufactures chips for use in computer and telecommunications networks, saw revenue fall by almost a third last year to about $5.8 billion, results for the period show.”
Intel has no good options.
It needs to raise money to help fund its future business ventures. But it can’t use its stock price as currency (by issuing equity) because its businesses are in sharp decline.
As WSJ mentioned, Mobileye’s stock is down 71% YTD. While its Network and Edge business saw revenue fall by a third.
Investors see the death trap and have punished Intel — sending shares down nearly 60% year-to-date (YTD).
No matter what Intel sells off… It’s selling for pennies on the dollar.
The worst of all worlds.
Don’t be like Intel.
3) The IPO Market Gets Cold Feet
The IPO Window closed last year. We wrote about it back in October 2023.
We opined that stock market turbulence creates fear, uncertainty, and doubt.
Most private companies watched stocks rip to all-time highs this year. But didn’t have the courage to take the leap to go public. They’re still waiting for the “coast is clear” sign.
But the longer they wait. The more likely they’ll continue missing new all-time highs. And will be stuck private for longer than they want.
From the Wall Street Journal (emphasis added):
“September is a popular time for companies to go public. This month’s stock-market volatility is putting some plans on ice.
Companies weighing whether to make their stock-market debuts face a critical decision in the coming weeks: pull the trigger soon so they can launch their deals before year-end or hold off until 2025.
The outlook isn’t rosy. The growing consensus among companies considering initial public offerings is to wait until next year, many bankers, lawyers and corporate executives say. It isn’t just the market’s recent choppiness, they say, but that turbulence could flare up again, given the uncertainty around November’s presidential election and how much the Federal Reserve will cut interest rates this year.
Last week, Chinese autonomous-driving technology company WeRide postponed its IPO, saying it needed more time to finalize documents. Ticket-resale company StubHub last month pushed off launching its roadshow for investors until September at the earliest, though some people familiar with the offering say it is likely to be delayed until 2025.
Others on the sideline considering late-2024 IPOs include artificial-intelligence chip maker Cerebras, according to people familiar with the matter.
The idea that 2025 would be the year that IPOs came back has been “singing in the chorus” since spring, said Clay Hale, co-head of equity capital markets at Wells Fargo. There was some optimism that the end of 2024 would at least be busier, but the recent market volatility seems to have all but extinguished those hopes.
“It’s really hard to plan to do deals in the fourth quarter unless you know the market is great,” Hale said.
So far this year, companies going public via traditional IPOs in the U.S. raised about $25 billion, according to Dealogic. That is below the $55 billion annual average over the past decade.
One of the popular windows for companies to go public is in the weeks following Labor Day, after a typically slow summer but before many companies’ quarterly financial statements are due.”
As we’ve noted many times over these missives…
There’s always a risk around the corner.
These companies keep hoping and praying for the perfect time to go public.
But there is no perfect time. Not anymore. Not in the new era of higher interest rates.
The free money era isn’t coming back. Or at least not for a while.
So these companies should just take the plunge and go public. Get the liquidity. And take the leap.
It’s a win for founders, employees, and private investors who can finally get their payday. And it’s a win for the public markets who desperately need new companies to analyze and invest in.
A win-win.
Good investing,
Lance
Written by: Lance @The Partners Fund
The post “AI Narrative Alive & Well | Forced Sellers | IPO Window Gets Cold Feet” first appeared on The Partners Funds