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Financial challenges at OpenAI (OPAI.PVT) should remain dark clouds for investors in key players in the AI ecosystem, such as Oracle (ORCL) and CoreWeave (CRWV), even amid sharp sell-offs in their stock prices.
The challenges simply underscore the core problems with the business models of OpenAI and others like it.
The OpenAI report: A story from the Wall Street Journal on Tuesday suggested that OpenAI missed several key internal targets for revenue and user growth, fueling a broad reassessment of the AI sector’s monetization timeline. CFO Sarah Friar reportedly warned leadership that if growth doesn’t accelerate, the company may struggle to fund its massive $100 billion plus data center plans.
The Philadelphia Semiconductor Index (^SOX) dropped 3.6%. Important AI infrastructure players like Nvidia (NVDA) dropped 1.6%, while AMD (AMD) slid 3.4%, and Taiwan Semiconductor (TSM) fell 3.1% as investors worried that a cooling in demand at OpenAI could signal a peak in the AI hardware supercycle.
Oracle and CoreWeave, two heavily indebted AI-centric companies that will need OpenAI to grow aggressively for years, given their debt and capital commitments, tanked the most with respective declines of 4% and 5.8%.
All the names just mentioned saw modest dip-buying on Wednesday as the caution from the WSJ story lingers.
The companies respond, sort of: OpenAI didn’t return Yahoo Finance’s request for comment on the WSJ report.
A CoreWeave spokesperson did, telling us this: “OpenAI is a terrific partner, but not our only one. Our business is supported by a diverse and expanding set of customers like Meta Platforms, Anthropic, Microsoft, Google, IBM, Perplexity AI, Jane Street, and many others. As more companies build and deploy AI, demand for compute continues to grow. We continue to see demand exceed supply across the AI ecosystem, particularly as inference scales.”
Why the OpenAI news is a problem: One of the best synthesized summaries on this market-moving report came from Jefferies analyst Edison Lee. In a new note, Lee said he believes the WSJ report is an early warning sign and highlights challenges inherent to OpenAI’s business model.
The challenges Lee laid out will make it hard for the bulls to step in on Oracle and CoreWeave on stock price weakness.
“We believe [the OpenAI report] reflects the general problems of pure AI model companies’ business model, regardless of whether they are Chinese or US players,” Lee wrote.
He added that the pure AI players’ business models have the following challenges: “Limited customer stickiness (low switching cost); Limited differentiation (model is a commodity) but many players (we identified 17 LLM players globally); High investment requirement to stay competitive and relevant (training is expensive and will become more so owing to rising hardware and power costs); A lack of economies of scale in inference.”
