Motley Fool Hidden Gems Investing - OpenAI’s Strategy Shift Ahead of IPO

Starting point is 00:00:00 Is OpenAI going to IPO in 2026 and have they created drama between Amazon and Microsoft? Motley Fool Money starts now. Welcome to the Motley Fool Money with the Hidden Gems team. I'm Travis Hoy and I'm joined today by Rachel Warren and Lou Whiteman. reports have surfaced this week that open ai is eliminating side projects like the browser that they kind of played around with a few months ago the video app in favor of enterprise products that actually have some traction like codex the growth at anthropic has to be one of the reasons lou that they're thinking about this but they're also you know if you're going public in 2026 which

Starting point is 00:00:50 is still the rumor that by the end of the year they're going to be a public company you got to focus on what actually makes your numbers look good for public investors. So is this the right move for them to kind of get rid of those side projects and just go, hey, we're going to be an enterprise API company now? I'll hedge a bet and say it is good to de-emphasize them. Okay. Because look, this is part of growing up. This is part of going from just being a toy factory to an actual business capable of making money, which is what you have to do for an IPO. Side quests, as they call them. They're great if you have an established product. You know, weekend hackathons at Google come up with good stuff, but you need the established product. Even 3M, Travis, not to

Starting point is 00:01:34 like, you know, poor salt and wounds, but their famous 15% time. Which, by the way, was more marketing than anything else. Right. As someone who worked there and it was supposed to have 15% time. And look at how they've turned out. Right. So, you know, it does at the end of the day, if you are a for-profit business to focus on the things that will make money to justify yourself. Web browsers, video generators, even hardware devices, which, you know, they spent a lot of money. I'm curious if that memo hit Johnny Eve or if he's kind of exempted from that. But all these things are cool. But if you were going to go public again, especially if you're going to go public and need a ton of revenue just to pay the bills, you should focus on how you're going to make money. Selling to enterprises is a better way to make money than, hey, we should make a new browser. Yeah, Rachel, we did hear from Sam Altman that the Johnny I project, whatever hardware they're working on is still in the works. So sounds like he's still very excited about it. We don't know exactly what that looks like. But this does seem like there's going to be at least a little bit less emphasis on ChatGPT, which is the product that we're probably most familiar with as consumers. And they're gonna be focusing on things like Codex. So what are your thoughts there? Yeah, it's interesting. I think that OpenAI is definitely making a pivot right now. And I think that they are very much trying to cut their losses to double down on what's actually going to move the needle for revenue growth and eventually profitability moving forward. I do think there's a bit of a wake up call from Anthropic for sure. You know, Codex is an interesting tool. This has really evolved into a very sophisticated, agentic platform. And OpenAI is essentially betting that it's going to be the operating system for the modern office and that it's one of the really key drivers they're going to need as they move towards an anticipated IPO.

Starting point is 00:03:18 So the new Codex, it's much more than a simple code writer, right? It's basically this cloud-based command center. So multiple AI agents can work on complex tasks simultaneously. And this could really turn OpenAI from a research lab into more of that high-touch partner that can actually help companies rewrite their legacy systems from the ground up. It's kind of interesting. I mean, when you compare this to Alphabet, right, so you've got Google, they already have the advantage of baking AI directly into search, Gmail to Chrome. That's really that kind of default choice for the average person. OpenAI is playing much more of a top down game, right? They're betting that if they become indispensable to the global workforce, that individuals will naturally stick with them as their primary AI partner. They're even deploying engineers to act as consultants for big firms, which is really interesting as well. the IPO would be interesting to watch if indeed that comes to fruition this year. I'd probably sit on the sidelines for a bit, but I think that will be probably one of the most anticipated IPOs if and when it does happen. Yeah. Lou, I want to know your thoughts on the IPO, but also the other question that I've been thinking about is, have they kind of just ceded the consumer market to Google? I mean, this was the original battle, right? ChatGPT was supposed to disrupt Google's entire business. Sam Altman did these interviews where he kind of called them a dinosaur directly

Starting point is 00:04:35 or indirectly. And now it seems like they're going, you know what, we've got to go to the enterprise because we don't have a sustainable business model with consumers and going, well, I guess Google's the game that's left in town. Well, I mean, as Rachel said, Google has a much more natural path to the consumer. I think it was smart to start with ChatGPT to kind of get the imaginations going. But again, this is about moving from science experiment or toy to a sustainable business. Thing is, is that even if Google gets the consumer, I think it's going to be a lot less sticky than the enterprise. So I think that if this all ends up somewhat commoditized, you can do price wars, you can do features, you can do, there's all sorts of way to quote unquote

Starting point is 00:05:16 win the consumer after, but it's as far as, as an emerging technology to get established in the enterprise, that's a lot better path to business success. Speaking of AI in the enterprise, we're not done with OpenAI. We're going to get to the battle that's potentially brewing between Amazon and Microsoft over OpenAI's future spend. You're listening to Motley Fool Money. Welcome back to Motley Fool Money with the Hidden Gems team. OpenAI has also announced a major deal with Amazon to be one of their cloud providers for some of their future services and products. Microsoft is supposed to be the exclusive supplier of, quote unquote, stateless APIs. So, Rachel, this has actually come to the point where Microsoft has threatened legal action. We've got some quotes from some Microsoft executives or lawyers saying, you know what, if you want to battle our lawyers, we're happy to do that. There's supposedly negotiations going on behind the scenes.

Starting point is 00:06:13 But is this something or nothing from three of the most valuable companies in the world battling over this future of AI in the cloud? I don't think it's nothing. And I mean, for those of us who've been following this very kind of longstanding relationship between Microsoft and OpenAI, I think it's a little bit stunning. So the core of the dispute is this suspected sort of breach or alleged breach, right, of the exclusive partnership terms. So Microsoft is saying, we have this longstanding agreement. This requires all access to OpenAI's models to be routed exclusively through Microsoft's Azure platform. And this is for the API. This is not necessarily for the consumer, just to kind of clear that up. Yes, correct. So there's kind of a few different ways this could go. To sort of look at the more bare case, right? So let's say Microsoft follows through on its threat to Sue. We could

Starting point is 00:06:59 see litigation. Obviously, a court case would freeze plans that OpenAI has to launch Frontier on Amazon Web Services. It could potentially give Microsoft more time to build its own competing products. I want to be clear, that's the nuclear option. I don't necessarily think that's the point it's going to get to. It would very much kind of damage the relationship between what has historically been, you know, the kind of two most important partners in the AI world. There's obviously the question about if there's litigation, how does that stall OpenAI's expected 2026 rumored IPO? I think the most likely short-term outcome is some kind of a behind-the-scenes agreement or settlement before OpenAI's new frontier platform officially launches. I kind of

Starting point is 00:07:39 would tend to think that they're going to want to avoid a messy courtroom battle. Maybe they're going to renegotiate their contracts to give Microsoft a piece of the pie from any business OpenAI does on Amazon's cloud that would allow OpenAI to keep its new partners and ensure Microsoft is compensated for losing its exclusive status. But this is really the early innings. And I do think this is something that's important to watch as investors, but also for any of us who we're following this space really closely. Yeah, you know, it's interesting because, you know, we talk a lot about the different strategies companies have used to try to hyperscale. I mean, everything from Apple, which after the fact decided will just lean on others, to the all-in

Starting point is 00:08:15 players, whether it's OpenAI or Alphabet. Microsoft has sort of always been in the middle, right? They're spending a lot of money, they're building up a lot of the infrastructure, but they also have been leaning on partners. This sort of feels like we're finding out the weakness of that, right? Honestly, letter to law, I think open AI probably has a pretty good case here. If you look at it, like, look at anything that comes in directly through open AI. Yes, we'll go to Microsoft. But if anyone who wants to access these frontier products through someone other than open AI, well, it's just Amazon. I don't think that violates the weird thing is too, it's still hosted on Microsoft's infrastructure.

Starting point is 00:08:55 I'm not sure if that's a revenue gain or just a sunk cost, but this is a weird relationship now. And it's been getting weirder over the last two years in particular. Yeah, yeah, yeah. Rachel called it a surprise. Like, it feels like that this particular thing,

Starting point is 00:09:10 this is getting towards the end game, but they have been moving away from each other. I think if AI ends up commoditized, Microsoft leaning on partners and kind of just doing it that way, I think that this will end up working out for them just with Claude and all sorts of different partners. But in the meantime, it's kind of Microsoft needs to be a little aggressive here because they could be left holding the bag if they're not careful. Yeah, they still have a big equity stake in OpenAI too. So we talked about that IPO. That could be a tailwind for them. So you've got multiple angles here for Microsoft. I can't imagine this is going to end up being a huge court battle. Things are just moving too fast. But, you know, Altman, OpenAI definitely pushing the envelope. And I guess, you know, that makes a lot of sense when you have a once in a lifetime opportunity to be this generational company and potentially IPO for, I don't know, over a trillion dollars. The stakes are very high at the very least.

Starting point is 00:10:10 When we come back, we're going to talk about the role that shorts play in the market. You're listening to Motley Fool Money. Welcome back to Motley Fool Money with the Hidden Gems team. SoFi was hit with a muddy water short report and the stock dropped about 6% quickly during trading on Tuesday. The drop was almost eliminated by the end of trading. And then after the market closed, we found out that CEO Anthony Noto actually bought the dip. it was a little bit wild because the dip only lasted for an hour or two. But Lou, he jumped on that. I don't want to dive too much into that because there's a lot of complexities with how

Starting point is 00:10:46 they're doing their accounting as a financial institution and all that kind of stuff. But I do want to kind of go high level on what role short sellers have in the market because short selling is allowed. You can buy puts, you can bet against stocks, and there's actually a good reason. So what are the reasons for short sellers playing a role in the market? Everything needs a filter and everybody needs to not just hear confirmation bias. There's always two sides of a story and it's really important to hear both sides. Yes, there are some actors that are more over the top on the short side, but heck, I could throw out some price targets on publicly traded company from bulls that seem just as ridiculous to me. So I think there is both of that. At the end of the day, yes, shorts are often accused of you're just trying to make money on this. Well, again, turn on a financial network and hear someone talking about a stock that they think is going to the moon. They're probably trying to make money.

Starting point is 00:11:44 They're not just opining. We have this terrible reaction to negativity and I get it. And there's good reasons for that. I don't personally do any shorting anymore, but I think that short sellers are a fantastic part of the market. I read this Muddy Waters report. I don't own SoFi. I didn't see anything to be chicken little, but there are some really, really interesting things that at the very least, I think a lot of SoFi bulls should, oh, that's interesting to learn. This is a necessary part of the market. It's just one we don't like because we are optimists in nature and we want stocks to go up. We want businesses to do well. Yeah, Rachel, you know, we're long-term investors at The Motley Fool. But one of the things we always talk about, too, is you need

Starting point is 00:12:28 to be able to make the bull case and you need to be able to make the bear case. This is at least, you know, somebody who's writing out their bear case, taking a position in public. You know, let's look past the details of when they're going to close that position. But, you know, that does serve some sort of value in the market, it seems like. Yeah, there is value there. I mean, you kind of think of short sellers as the skeptics or detectives in the market. A lot of times, obviously, as investors, we're betting on a company's success. But the short sellers are looking for overvalued stocks, sometimes bad business models to bet against. And the role I actually do think of short sellers is important,

Starting point is 00:13:02 as Lou noted, for a healthy market. You know, they sort of provide that reality check. They can prevent sometimes bubbles by ensuring prices don't just go up forever based on hype alone. And a lot of times when you see a short seller publish a report, they're really just presenting a public argument for why they believe a stock is worth much less than its current price. Now, there are absolutely, I think, some philosophical and tactical concerns when it comes to short sellers. Obviously, shorts profit directly when others lose money. But it's also worth noting that short reports have been famous for uncovering massive corporate frauds in the past before they collapsed and hurt even more people. So I do think that it's important as investors, you know, whatever the stock might be, when there is a short report that comes out, if it's of a holding in your portfolio or a company on your watch list, I think it's good to take the time to read those reports, digest the

Starting point is 00:13:49 information. It's certainly not the time to panic sell or, you know, liquidate your position in a company. But I do think sometimes there can be helpful, nuanced information that we can get in those reports. How management responds is really, really key, too. A lot of times we'll see companies come out with really aggressive, robust responses that dispel a lot of fears in the reports, but certainly they play an important role in the market. And I

Starting point is 00:14:10 think that that's something that can be valuable to us as long-term investors. That's so right. And Anthony, if I can give you advice on SoFi, I get why just the quick statement was, this is wrong, we're going to sue. But I always like, and again, I don't think that SoFi is just this massive and run or anything that I always like, take the time, put out a press release, not just saying these guys are trying to profit and now we're going to assume, explain why they're wrong. Because, you know, in a very Emersonian sense, if you can question your beliefs and they come out strong on the other side, I think that, you know, that's that should be a positive for the bulls. Yeah. And if you have not read any of these reports, you can go back to the mid 2010s.

Starting point is 00:14:52 That's when, you know, some of these big short sellers kind of gained a lot of attention and it was finding frauds. You know, I remember China Media Express, right? There was this story of what this company was. They actually dug deep in the SEC filings. They went to the headquarters, found all kinds of other companies that were headquartered at the same location. There wasn't a real office. There is a real detective work in some of these reports, whether they're short, whether they're long. So that's what making markets is all about. So before you have any jerk reaction, something to think about. Everybody has a role in this market. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal

Starting point is 00:15:30 recommendations for or against so don't buy or sell stocks based solely on what you hear all personal finance content follows the motley fool's editorial standards and is not approved by advertisers advertisements are sponsored content and provided for informational purposes only to see our full advertising disclosure please check out our show notes for lou whiteman rachel warren and bart shannon behind the glass i'm travis holland thanks for listening to motley fool money we'll see you here tomorrow Thank you

Motley Fool Hidden Gems Investing - OpenAI’s Strategy Shift Ahead of IPO

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.