It is a big year for initial public offerings (IPOs). SpaceX became a public company on June 12 raising $86 billion. This fall the two most successful AI companies, OpenAI and Anthropic, are expected to go public with each valued at just under $1 trillion. We’ve never seen IPOs so large. The excitement level will be sky-high — except in my office. While much anticipated I see flaws in their business model. Here’s my case:
The AI buildout requires a tremendous amount of capital. The largest technology companies were flush with cash until they started pouring money into the AI buildout. Meta, Amazon, and Microsoft all raised money through stock and bond offerings in order to fund their massive AI infrastructure and data center buildout.
A seminal moment came when Alphabet raised $85 billion on June 2 from an equity offering. Warning flags were raised and investors wondered if spending was too high. Not coincidentally, the AI stock rally stalled.
For the largest AI developers, the good news is that there is a high barrier to entry. Few companies have the cash needed to become an AI hyperscaler. While there are few AI developers (OpenAI, Anthropic, Alphabet, SpaceXAI, Meta Platforms, Microsoft) competition is fierce. Anthropic is the most successful as they target the B2B enterprise sector, but companies are beginning to question the increased spending on AI. How much is too much?
Meta’s Mark Zuckerberg hears the frustration and recently said Meta will compete with others on price. Cheaper still is the competition from Chinese open-source models, which can use AI to write code for the end user. Price competition for AI developers is arriving.
AI models are constantly improving and it is becoming a commodity business. Over time, Anthropic’s Claude will look similar to OpenAI’s ChatGPT, which will look similar to SpaceXAI’s Grok. Add Alphabet’s Gemini and others to the list.
Another problem for AI developers is the low cost of switching to a different service. There is no moat protecting them from competition. It’s similar to the streaming service industry where viewers constantly rotate from one platform to another.
The question is who captures the value created by AI: the companies deploying it or the developers of the actual AI? By most accounts those companies that use AI are benefitting from greater efficiency. They should. But what about those that develop it? I’m in the minority but I see pricing competition in a commodity business.
— David Vomund is an Incline Village-based fee-only money manager. Information is found at www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
