Market Euphoria and Dot Com Comparisons

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But when it comes to home projects, it's different If you don't like a show, you might lose a few minutes If you hire a friend, of a friend of a friend to fix a leaky ceiling, you could end up with a flooded kitchen Maybe I know a guy just isn't enough for your home That's why thumbtack works so well They'll match you with a top rated local Pro, and you can see photos of past work, credentials, and reviews all right in the app For your next home project, try Thumbsack Hire the right pro today If money is evil, then that building is held S sound Welcome to Profty Markets. I'm Ed Eson. It is june seventeenth. Let's check in on yesterday's market vitals. The S andP five hundred and the NAasSDAQ declined as chip stock sold off. Meanwhile, the TO hit another all time high. Brent crude fell lower. The yield onntena Treasury slid ahead of the Federal Reserve's interest rate decision due this afternoon. On Caly, the odds that the Fed holds rates steady are at ninety nine percent finally BaseX stock popped another fifteen percent early in the day Before pairing back most of those gains, it is now roughly as valuable as Amazon More on that later Okay What else is happening? OpenAI's financials were just leaked and the numbers are wild. The company hit thirteen billion dollars in revenue last year, up more than two hundred fifty percent from twenty twenty four. But the number that has everyone talking is how much OpAI lost last year. The answer thirty nine billion dollars. Meanwhile, the company has just filed to IPO and plans to go public later this year, which begs the obvious question Is this kind of spending sustainable? So to dig into these numbers, we are speaking with the man who actually broke this news, the guy who found the financials and that is Ed Zitran, author of the Where's your Ed at newewsletter and host of the better offline podcast Ed Great to see you. Thank you for joining us once again. I know you've had a busy day because you literally just reported these financials I'm not going to ask how you got your hands on them, but what what I do know is It's been independently verified, audited by the Financial Times. These are real numbers. found these numbers Um Take us through them, what should we know about these financials? So last year, OpenAI spent about thirty four billion dollars to make about thirteen point zero onears sorry, o seven billion dollars Dob hadad about twenty two billion dollars in cash at the end of the year. lost about twenty one billion dollars. That thirty eight, thirty nine billion dollars number is what I would describe as Gap voodoo There is some very strange stuff and I'll be going into this in future episodes going on in the balance sheet and everything with this company. They turned from a nonprofit to a for profit, though they've remained profitless last year, which means that they have their net loss is quite strange like thirty eight point five billion dollars. But the number Id like to come back to is they lost twenty one billion dollars from operations. And they spent astronomical amounts on sales and marketing. They spent seven point five billion dollars on cost of revenue, nineteen point one eight billion dollars in R and D. But that sales and marketing cost, that five point seven three billion dollars is one I really like to hammer on What It's like it's just it wass just like it's like, excuse me well, how much did you spend because The thing is here, there could be, I think there's a potential that that could be partly passed through to Microsoft with the revenue share, I truly don't know. this just me guessing But nevertheless, that's an extreme cost. But another thing to note is eight hundred sixty seven million dollars. So about six point six percent of openen AI's revenue last year came from Softbank Now I truly don't know what that's for. They have a thing called crystal intelligence. I'm not kidding, it's actually called that. spepelled the same way too And But that's a very alarming number because that's a huge amount of revenue from one partner that I don't think was probably causing their cogs to spike at all. That's a large amount of that revenue coming from a single partner The tes. moreore than likely just I mean, I can assume not Crystal intelligence is not launched anywhere. It's only It took a few months to even get out the door. It was announced in february twenty twenty five. It took until the end of the year to hear anything about it, but they still paid nearly a billion dollars It's very concerning, and it also suggests that open AI's growth is not quite as fast as we believe too Just going back to the losses here, because this seems to be the most important thing for investors to understand is how much money are they burning really The number that I saw, the net loss that was reported by you and by the Financial Times independently. I know you guys looked at the same document, but there are a lot of numbers on there and it gets a little confusing The number I saw was thirty eight and a half billion dollars in net losses up eightfld year over year. Now there were there was some nuance in here U, because As you pointed out, when you take into account these other factors like interest income and interest expense, the number goes up to sixty billion dollars. and you pointed out that they lowered that number by taking that stuff out. But then the Financial Times also spoke with someone familiar with the matter And this person who was familiar with the matter said that The reason that that number was so high was because as open AI's valuation went up They had to create this thirty billion dollars charge in investor rights, which I kind of understood to be stock based compensation. And so their argument was when you adjust for that the real net loss is closer to eight billion dollars in losses. All of this is obviously very confusing and I don't fully understand it. So I just want to get your view on how do we make sense of this? because there's a lot of numbers, a lot of nuance that are not fully sure what it all means. So, I did not speak to the person familiar with the matter. I do not know who they are. I think that's Wank Just going to be completely honest You spend spent thirty four billion dollars to make thirteen point zero seven billion dollars. You didn't just lose eight billion dollars. Stop When I read that comment, I did a big chuckle and I knew all the boosters would all get hot and heavily and' be like, ah haa, the proof we need. The numbers to look at are the actual costs and the actual revenues. These companies, Open AI in particular, have Lved high on the hog. spreading weirdness around numbers. The numbers to focus on how much they're burning. onene point five seven billion dollars just on general administrative, just on people. And I don't even think that that includes all the people. doesn't I don't have any other knowledg as to this because I don't have the definitions of these terms from within the sheets. The The thing is here is this is a company with spiraling costs dramatic costs way beyond what we thought that is spending and they put research and development in there and they market that, I believe, personal belief here. Be they want people to think that this is a temporary situation, that this is something that will go away. that when there's enough R and B, they can stop. No, no, no R and D number going up very high Everything is increasing and every cost is increasing And I think it's just a kind of a frightening sign of what the innards of these companies look like. And think about it like this, OpenAI has already said as part of the Musk trial that they're going to spend fifty billion dollars on compute this year alone in twenty twenty six. Their losses are going to be astronomical. I don't have any privy knowledge to the twenty twenty six numbers, but Based on these, they could be burning eighty ninety billion dollars. It's genuinely It's genuinely horrifying I'm glad that I got to tell this story before the S one is filed. because I think people need to say What the innids of this company look like before they get a chance to massage them Yeah, I agree that actually one of the craziest numbers was the sales and marketing number. up to five point seven billion dollars. it jumped four hundred and eighteen percent in one year. That's forty four percent of total revenue. And we just look for context, when you look at Facebook's marketing, it peaked at twenty eight percent of revenue in two thousand eight Googles hit eleven percent in two thousand three, open eyes at forty four percent. They're spending astronomical amounts of money to build AI, but to sell AI to make it prorofitable and that does seem to be a real problem. I mean Just looking at the SpaceX IPO as a comparison point when the S one came out, I wrote about it and a lot of people talked about it. I'm sure you talked about it as well. The numbers did not look great from a profitability perspective. We called it a money furnace, cash incinerator, et cetera becausecause that's what was happening and continues to happen. The company is losing astronomical amounts of money buildilding mostly AI, also rockets, but AI is the real money loser. And yet the stock is flying rightight now. It's as valuable as Amazon currently So I guess I'd be interested to hear what you think will happen. when the S one finally does come out for open AI, maybe these numbers concerning to people or maybe they will be. I'd be interested to hear your views. If openpen AI had SpaceX's losses, they'd be so happy. But then again, SpaceX doesn't have open AI's revenues. So who knows? I think the The reason SpaceX is flown in the way it has is because of the musk reality distortion field and his ability to play Goldman and JP Morgan against each other, both of them everyone and everyone there should be ashamed of themselves for pumping this for what just like o, AI revenue will increase three hundred X in four years. But all that aside These are fundamentally different companies Even though SpaceX has its horrible burning AI element, it still has Starling, it still has the rocket ships It also has the social network, but I don't know if it'd said that was a plus It still has a function business. Open AI has Chat GPT and API That's it. L they have They can dance around being like, o, we got Jony Ives nonsense. Oh we got like a consumer device? or we got we're going do an everything app But they're just dancing around the fact that they have one product They have one product with a few offshoots. They don't have ways of investing more money to make money. You mentioned profitability earlier I don't think that's possible. I don't like their costs are so severe that I don't think profitability is actually possible for any AI lab. I think that Anthropic is going to look similarly horrible. I think that the markets believe for some reason that things won't look this bad I've been speaking to people all day about this and everyone's saying, wow I didn't know it would be that bad. And I genuinely I gott to laugh a bit. It's like, did people think I was kidding? D people think I was chuckling to Oh I just I guess they were bad. No Of course they were this bad So I don't think the open AI and anthropic have the nuance and also the aggressive bully mentality of Musk So I really deeply dislike it to be clear Do an IPO with the amount of bullshit that will be necessary to sell this dog Don't know how becausecause remember, in the S one, they're also going to have to do growth trajectory. They're going to have to say what they could grow into. I think it's I think it's going to be difficult to float. I they could theoretically. but I don't considering How SpaceX is done, I think they have a higher chance than none But the same time, there, SpaceX's numbers were bad These numbers are terrifying. These are scary numbers and watching the Cope Olympics on Twitter as people like, well actually it's okay. You saw that quote, you saw the quote that said eight billion. It's okay. They didn't actually spend thirty four billion. I only spent eight billion dollars. It's okay. Nothing bad happened at all. notothing weird It's all very silly because this is a company that spent thirty four billion dollars to make thirteen point zero seven billion dollars. And also eight hundred sixty seven millionllars of that was what looks like given to them by Southbank. And it's That is not a stable or thriving business. This is a business that is just consuming capital at an alarming rate With no sign of stopping, they just raised one hundred twenty two billion dollars at the beginning of this year I don't think they're doing that because they're going to get profitable It does seem as though when this company goes out, when it goes public and it appears it is going to go public. They have filed plans to go public in the fall The valuation will be similar to SpaceX, almost entirely dependent on the CEO's ability to tell a compelling story that enough people buy into and believe Elon is someone that you could arguably good money on doing that because he has a proven track record of being an incredible storyteller specifically to the markets on what his companies will achieve Sam Alman. I'm not sure I back him. to tell a compelling story or to capt the imaginations of investors in the markets because it's clear that the numbers aren't going to do it for him. Also the other day, I just I had to go and check on this while we're talking. Here's the reason I don't think I agree with you fully. I don't think Sam Malton's got the head for this because when his customers started complaining about the cost, he said in a panel, ye AI costs are a huge issue now. You don't say that, Sammy. You don't That's not that's not what investors want to hear They you said you make some p about how like we're doing cost adjustments, but people are really excited to see what they can do with AI. You don't go, yeah, that's a huge problem. what's he going to do on the road showh? They're going to be like, ye, you keep losing money. Yeah, you know You gott to lose money to lose money? Yeah, it's certainly very concerning. Well we're wrap this up but Eitin, we always appreciate it. It's amazing that you got your hands on this. It really is so important in these companies, the size the evaluation and the sense in which they are becoming in a lot of ways systemic to this market and to expectations of this market is so important and now we've finally gotten some Transparency into what's really going on here. so we appreciate it. EdZitin is the author of the Where's yourour Ed at newewsletter also the host of the better offline podcast, Ed. Appreciate your time. Thanks for having me After the break BaseX stock keeps going up And for even more markets insights, you can subscribe to my weekly newsletter, simply putut at simply put. profgmedia. com Support for the show comes from OdDu. Running a business is hard enough, so why make it harder with a dozen different apps that don't talk to each other? One for sales, another for inventory, a separate one for accounting. Before you know it, you are drowning in software instead of growing your business. 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Get three months free at granola. ai slash markets We're back with prorofty Mets in its third day of trading SpaceX became the fifth most valuable company in the world tied with Amazon The stock popped more than fifteen percent early in the day to reach that milestone and briefly eclipsed Microsoft two That rally followed an announcement from SpaceX that it is acquiring AI coding startup cursor for sixty billion dollars. The stock gave up Most of those gains through the day, closing up just five percent still, shares have rallied forty eight percent from their IPO price on Friday. So clearly there is still a lot of excitement around this company. So we wanted to talk to someone who has actually run the numbers and attempted to value this stock. So joining us to discuss SpaceX, We are speaking with Nicholas Owens, equity analyst for Morningstar, Nicholas Thank you for joining us. You are someone who has actually done a discount of cash flow analysis of this company. You valued the company, you wrote about it. And your number that you reached was seven hundred eighty billion dollars which is I mean we compare it to the current valuation two point six trillion dollars. It is notably a lot. lower. take us through how you got to that number The headline number that you just mentioned is the weighted average of three scenarios. And the way we valued SpaceX was in three parts, essentially the rocket piece, Starlink And the AI piece, which is itself kind of a set a set of moving parts I would argue that the Rocket in Starlink is more straightforward. It's a more mature part of the business. And in most of our scenarios, they're worth, say six hundred eleven billion dollars Um In terms of enterprise value, some forty dollars a share, let's say Um The AI, we think there's a lot of wriding on some unproven outcomes. and I'm not really talking about the science or engineering behind data centers in space, though there's some debate about that It's really the financial benefit of having a data center in space? Is there some kind of operating cost advantage versus a terrestrial data center. We model this business primarily as an infrastructure play. so renting out computing capacity the way they've started to do with Anthropic in Google. You know, if Grock takes off, then we would say that we're sort of indifferent between them renting out the capacity and using it for lots of Grock jobs and then monetizing that some other way. We would assume there's some market rate for that, and that's how we modeled it. And so the difference between our valuation and the market price really has to do with how probable do you believe it is going to be that both the Starship rocket is highly reusable, like in hours or days and that data centers in space will be call it a compelling bargain in terms of their operating cost versus terrestrial. Both of those might be true We think there's only about a seven percent probability that they will both be true at the same time and that results in a much higher valuation that's closer to the market price here And so I think that the market, you, investors are essentially saying they believe these will both be true for sure, but we don't This is the thing that I think is really important, which is that your valuation is weighing multiple probabilities at the same time and it isn't ruling out what you describe as the moonshot scenario, which I think is an accurate portrayal of some of these businesses, orbital data centers down the line civilizations and cities on Mars. I mean, how do you even value that? But the point being You've actually taken all of that into account Weighight up the probability and you've landed at a number that is less than half what the company is currently trading at Um, and I think that that is striking. I want to get to your reactions to how the stock is trading in a moment, but I want to stay on your valuation for a moment longer. You also said you said, quote, we value SpaceX at seven hundred eighty billion dollars with a morning star economic moat rating of Narrow. I've seen a lot of people pushing back criticizing u the mote rating. A lot of people would say this is an extremely wide moat. They're building rockets. Not many people can do that Take us through why you landed on on that I'm really glad to have the methodology behind me, so to speak. att Morningstar, we had quite a good discussion about this a couple of weeks ago. And I will say this, the The SpaceX business that, um I as the aerospace and defense analyst was planning to cover until February has almost all of the characteristics of a wide mo business, a very, very prodigious cost advantage both through the R and D and how they do it and the economies of scale. They've just done it more than anyone else. And so the satellite business and the rocket launch business kind of reinforce each other in terms of them just marching down this cost curve. They're a decade ahead of anybody else and we'll continue to do so assuming Starship continues to add you know, the bigger loading bay of Starship means that you can put more stuff in it. so your cost to launch a kilogram of stuff goes down. you're sort of just dividing by a bigger denominator and that's amazing The company gets a nerr remote rating from us Huz of the AI piece, which is I would say indeterminate at best in terms of what its moment would be and They're investing very aggressively in that business. So you're taking these returns on capital that are evident know from the Starlink and Rockets business, and you're saying I'm going to write a sixty billion dollars check to go get cursor. I'm do similar size of investments to build data centers in space And while I think there could be moes in AI We don't see evidence of them here. So Grock is not one of the leading models. I do think there's a pathway in this, let's say, moonshot scenario, and even in what we call the minimum viable product scenario, where they can extend some of that cost advantage into data centers in space. If they can, then that um would be let's say My, but it's, u it's it's Too soon to say, frankly Yeah, this is part of the problem with this stock, which is It was a space company And then a couple months ago they turned it into something else by buying XAI and then saying that actually It's an AI company orr that that is the twenty eight trillion dollar or twenty six trillion dollar opportunity according to the S one. That was the total address of a market with AI. So I mean, I appreciate you clarifying that. It's like there are different businesses that we're evaluating here. The space business might have a wide moat This is no longer a space business, apparently. because that's not what they're pitching and that's supposedly not what the valuation is predicated on Let's go to the stock price Do you agree with that? Yeah. And I think seguing to the stock price is appropriate because I think the let's call it packaging of this company as an AI business is very rational way to tap into investor appetite for AI Right. So the IPO price was one hundred and thirty five. We're looking at two hundred dollars a share at the moment. Um does not much sense to me. I assume it doesn't make much sense to you when I think about reasons why that might be the case The first thing that jumps out to me is that only four percent of the shares are available to the public. The float is incredibly small, which to me means this has high potential to become a meme stock and seems to look like it already is a meme stock U Is that the explanation? I think so. I thought about it in terms of supply and demand as you point out small float. and then you have this additional Let's say the market is looking forward to sort of let's call it structural demand from passive funds, ETF's and others that track a handful of indexes Um the u and, you know, Our moonshot scenario, if you dial the probabilities to one hundred percent, right now, it would be do one hundred and sixty nine dollars a share So what which you know, and there's hundreds of billions of dollars of potential revenue in there. We are modeling a scenario in which they become a major player in gigawatts of compute and space, et cetera, sort of giving them the benefit of all that Doubt We get to one hundred sixty nine c, the rating would probably be close to the same at these market prices. And that's just because I think investors are either pricing in Forurther options like you know a city on Mars which we don't ascribe a positive value to. It's sort of a wash. You know, if you're investing more in these shares, you're paying an option to see if that's going to work. we would say that those types of other projects are more likely than not to not work out U which you know, maybe puts me in the minority there, but Um in the longer term, starting at the at the earnings announcement that I anticipate at the end of July or early August Big chunks of shares will come online from the lockups from insiders And so I think that will be, you know, you'll have a NASAC rebalance before then, but then you have a decent chunk of stock coming online from insiders. And I think that will be the next real test of supply and demand How concerned would you be? do you think we should be about those lockups? To me, it seems like that's going to put enormous pressure on the stock. And if you're holding this stock at two hundred dollarars, I mean, it seems like that should be top of mind. I mean kind of impact do you think those lock upp exirations will willll actually have on this I wouldn't be able to predict a stock chart, so to speak, but it's tens of billions of dollars. It's more than the IPO flow will come online there in that first big chunk after Q two earnings. And the indexes that are buying As the float increases, most of them do this float adjustment to their weighting. So their demand will kind of slowly scale up, but I don't think it will offset that chunk that's likely to come online The perspective here is who's selling? These are investors who've owned this stock as a private company for more than a decade in some cases They don't care if it's, u one hundred, sixty hundred, seventy or two hundred dollars. Their cost basis is nothing you know, And so u That's just and the price is set by the marginal seller. That's what I keep saying. Yeah, one hundred percent. Final thing here, Space just announced the sixty billion dollars deal for Cursor, which is this AI coding startup. They had announced that there was an option to buy previously, so we're cutting a little bit of deja vu, but it's now and they will be paying in stock which I'll give credit to SpaceX Great move highly inflated stock price at this point. That's really That's really effective currency in the M andA market. does that acquisition change any of the math on your valuation? Does it change your perspective at all or not It's sort of mostly a wasash. We actually lowered our fair value. that probability weighed to sixty two from sixty three today. the cost of the but it actually it raises the moonshot value. So I think The whole idea of Kursor, my understanding was it was to bring on these people who were able to be able to make rock you know, learn better and be more useful for coding type applications So I give them benefit of the doubt and say let's make that true. And it was originally structured as an option to buy if that, let's say likely or proves out. I think they kind of just jumped to the finish and said, let's do it u, the and of the purchase price, the outlay and the dilution of sixty billion of equity is offset by an adjustment I made in the forecast of let's say greater enterprise type revenue from that audience. Nicholas Owens, equity analyst for Morning star. This will be very interesting to see how this dog trades over the next few weeks and months and I'm sure we'll be having plenty more conversations. Thank you for joining us. Thank you It's official The stock market has entered crazy to SpaceX is now as valuable as Amazon despite generating less revenue than Macy's And all over Wall Street, I'm hearing things about how the fundamentals don't matter anymore with SpaceX because this is a once in a generation company that will save humanity, exactly the kind of rhetoric. that has fueled previous stock market bubbles. But it isn't just SpaceX The entire stock market