Artificial intelligence (AI) chatbot ChatGPT amassed 100 million active users just two months after launching in November 2022, becoming the fastest software application to ever achieve that milestone. Its creator, OpenAI, is now valued at $852 billion, making it one of the largest private companies in the entire world.
OpenAI is reportedly exploring the possibility of an initial public offering (IPO), which would see its shares trading on the public markets sometime before the end of 2026. This will give everyday investors an opportunity to own a slice of the company, whereas only institutional funds and wealthy individuals had the opportunity to buy into this growth story previously.
However, there is one way to indirectly invest in OpenAI right now. Ark Investment Management, which is run by seasoned technology investor Cathie Wood, invested $240 million in OpenAI during March. It spread the position across three of its exchange-traded funds (ETFs), which investors can buy through any major investing platform. Here's how to get involved.
Image source: Getty Images.
Three technology-focused funds
The three Ark ETFs with exposure to OpenAI are:
- Ark Innovation ETF (ARKK +0.54%)
- Ark Next Generation Internet ETF (ARKW +0.80%)
- Ark Blockchain and Fintech Innovation ETF (ARKF +0.05%)
OpenAI represents just under 3% of the portfolio in each of the ETFs, which doesn't sound like a high degree of exposure, but these funds are typically designed to be diversified even when they have a narrow mandate. Choosing which ETF to buy is a matter of investor preference, based on what their existing portfolios might be lacking.
The Ark Innovation ETF is Ark's flagship fund. It invests in areas of the technology industry like autonomous mobility, intelligent devices, neural networks, precision therapies, and more. It holds 42 different stocks, and its top five positions are Tesla, CRISPR Therapeutics, Tempus AI, Shopify, and Coinbase Global.
The Ark Next Generation Internet ETF has a more narrow focus on areas like autonomous mobility, intelligent devices, cloud computing, and neural networks. Its top five holdings are Tesla, Advanced Micro Devices, Ark Bitcoin ETF, Shopify, and Robinhood Markets.
Finally, as its name suggests, the Ark Blockchain and Fintech ETF focuses specifically on digital wallet providers, cryptocurrencies, and financial technology companies. Its top five holdings are Shopify, Ark Bitcoin ETF, Circle Internet Group, Coinbase Global, and Block.
Investors who want broad exposure to the technology space to go along with their OpenAI exposure might prefer the Ark Innovation ETF, whereas investors who want to own OpenAI alongside a basket of financial technology stocks might choose the Ark Blockchain and Fintech ETF instead.
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Should investors actually want to own OpenAI?
OpenAI has around $24 billion in annualized revenue, which it generates by monetizing its growing portfolio of products. ChatGPT, for example, is free for consumers, but there is a usage limit which can be removed by paying a monthly subscription. The company also offers business plans which allow developers to plug into its flagship AI models to build their own software.
As I mentioned at the top, OpenAI recently raised money at a $852 billion valuation, which places its shares at a price-to-sales (P/S) ratio of 35.5. That is a steep premium to the P/S ratio of AI juggernaut Nvidia, which is currently 19.8, so I'm not sure investors would be getting a very good deal if OpenAI went public today.
Plus, OpenAI is still losing money, and it could be years before that changes given the substantial financial commitments it's making to build and rent data center infrastructure. According to The Wall Street Journal, the company plans to spend $300 billion to rent computing capacity from Oracle over the next few years, and public filings suggest it plans to spend a further $281 billion with Microsoft Azure.
OpenAI doesn't have that sort of money right now, so it will either have to grow its revenue astronomically fast from here, or it will have to raise more capital from investors, which will dilute existing shareholders. In my opinion, OpenAI's revenue growth is likely to slow from here because competition is quickly ramping up.
Anthropic, which created the Claude chatbot, recently announced that its annualized revenue crossed $30 billion, so it has leapfrogged OpenAI. Multitrillion-dollar tech giant Alphabet has also become a formidable foe thanks to its Gemini AI models -- plus, it has a distinct advantage over the start-ups in this space because it has an enormous infrastructure footprint, and it even designs its own data center chips.
While a new IPO is always exciting -- especially one of this pedigree -- investors should always maintain an eye for value. I think OpenAI is extremely expensive, which could open the door to significant downside if the company doesn't live up to expectations.