What the OpenAI valuation means for stock investors
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OpenAI is in early talks to sell employee shares at a $500 billion valuation, Axios' Dan Primack reports.
Why it matters: Amid calls of a market bubble, the lofty valuation provides justification for sky-high AI stock prices.
Driving the news: OpenAI is weighing a secondary stock sale, Primack says, as first reported by Bloomberg.
- The deal would increase its valuation by nearly two-thirds.
- The tech company's previous valuation was $300 billion.
What they're saying: "This is an AI Revolution, and OpenAI is the golden child," Wedbush Securities analyst Dan Ives tells Axios.
- The valuation for OpenAI could "hit a trillion," according to a note from Ben Emons, chief investment officer and founder at FedWatch Advisors.
- That could drive growth in sectors like semiconductors and chips.
Zoom out: The OpenAI valuation mirrors companies with exposure to AI driving the market.
- Fewer stocks are trading above their 200-day moving averages, and the number of stocks climbing versus declining is decreasing, Emons notes.
- That means a smaller number of stocks that are already expensive are driving the broader market, which leads to concentration concerns.
- However, if valuations are justified by earnings growth, then investors are right to be getting in, regardless of the elevated prices.
Zoom in: Emons highlights more baskets of stocks with AI exposure are outperforming the Magnificent 7.
- That could indicate investor appetite for lesser-known AI plays like S.K. Hynix (up 50% this year) or Vertiv (up 17% this year), as the Magnificent 7 stocks become more expensive and aren't performing as well on a year-to-date return basis.
- As Axios Markets has reported, the AI supercycle ETF is up 23% year-to-date, versus the Magnificent 7 gaining 6.2% in the same timeframe.
Yes, but: The OpenAI valuation could justify the prices of Magnificent 7 stocks with heavy AI exposure.
Be smart: Tech stocks are historically overvalued at the beginning of a technological supercycle.
- If you worried about valuations, you would have missed every tech rally in history, according to Ives.
The intrigue: OpenAI's employee stock sale also points to the increasingly delayed IPO process for startups.
- Employees used to stick around for a firm to go public. But that's taking longer and longer, and companies like OpenAI are finding new ways to reward employees in the interim.
The bottom line: OpenAI's valuation expansion gives investors a welcome sign that they may be right to ignore prices and keep betting on AI.
