OpenAI is... Weird

OpenAI’s CEO and corporate structure are downright weird. We learned yesterday that it’s even weirder than we thought, as the firm is looking to raise at (allegedly) a $150bn valuation.                                                                                                                                                                                                                                                                                                                                                                                                                 September 12, 2024 | [Read Online]( Silver banana goes to… In this issue of the peel: - The August CPI report triggered a tantrum in markets reminiscent of a child whose parent just told him “No” in the candy aisle… for the first hour of trading. Stocks quickly recovered—find out why below. - Petco’s earnings report got tails wagging across Wall Street despite very mediocre numbers. Meanwhile, Nvidia CEO Jensen Huang proves why he’s achieved rock star status. GameStop shares dumped on (do we even need a reason?) weak Q2 numbers, and Trump Media shares hit a fresh low after Tuesday night’s debate. - OpenAI’s CEO and corporate structure are downright weird. We learned yesterday that it’s even weirder than we thought, as the firm is looking to raise at (allegedly) a $150bn valuation. Market Snapshot Banana Bits - Investors are sheepishly growing more optimistic [for future earnings](. - Norfolk Southern’s CEO steps down amid s*x scandal [with chief legal office](. - Solar stocks refused to set yesterday as investors [became hopeful for further subsidies]( following the Trump/Harris debate. WSO Alpha’s Enphase Energy led the way, up 5.7%. - Ireland’s population may still be lower than it was pre-famine, but they’re raking in tax dollars from international corporations [like no one else](. - ABC and moderators David Muir and Lindsey Davis are under fire after what was perceived as an [“unfair” Presidential debate](. The Daily Poll Which of these companies’ recent moves caught your attention the most? [Petco's earnings success]( [Nvidia CEO's rockstar moment]( [GameStop’s continued struggles]( [Trump Media's share plunge]( Previous Poll: Does Apple Intelligence make you want to upgrade to the latest iPhone? Yes: 21.2% // No: 64.1% // No, but other features do: 6.5% // I don’t use iPhones: 8.2% Tilt the Odds in Your Favor In the competitive world of high finance, every advantage counts. Our exclusive curriculum, designed by industry experts, sharpens your skills and knowledge, making you a top candidate. Enjoy personalized coaching, targeted internship opportunities, and a robust network of finance professionals with [WSO Academy.]([Â]( Macro Monkey Says Of Mice And Elephants There’s an old urban legend that elephants are afraid of mice. I’m pretty sure it’s not true, but anyone who played the [Impossible Quiz]( back in the mid-late 2000s certainly thought so. Either way, let’s pretend that it is because that’s way funnier. And it certainly was true for the first few hours of trading on Wednesday. A mouse-sized uptick in the inflation rate triggered an elephant-sized stampede away from stocks. Let’s get into it. The Numbers? On a monthly basis, consumer inflation via the CPI clocked in at 0.2% in August, in line with July and slightly above the average monthly rate needed to achieve the Fed’s target of 2% annual inflation (0.165%). [Source]( As usual, shelter costs were the main character, rising by 0.5% and once again acting as the “main factor” in the monthly increase, according to the BLS. Energy hooked it up for the month, however. In total, energy costs declined 0.8% in August, led by a 1.9% decline in fuel oil and utility gas services. Food prices saw minor growth, rising 0.3% away from home and just 0.1% for the misery of cooking yourself food at home. However, it was the monthly core inflation figure that really f*cked sh*t up, to use the technical term. Core inflation, excluding food and energy prices, increased 0.3% in August, up from 0.2% in July, largely triggering the market’s tantrum. Jitters emerged as the increase is seen as a threat to the potential larger rate cuts later this year. However, if we take a step back, the long-term trajectory remains in place. Headline CPI inflation clocked in at 2.5% in August, the lowest in 42-months. Excluding food and energy to give us core inflation, prices grew 3.2% annually, in line with July’s figure. Because core CPI excludes food and energy, shelter prices are more heavily weighted. However, this shouldn’t be as much of a concern for markets given that 1) shelter costs are calculated in a ridiculously inaccurate way and 2) shelter costs are on a huge lag. Plus, the Fed knows this. In a blog post from March, the central bank [explains exactly why]( their data collection methods “... results in CPI shelter data lagging current housing market conditions.” The Minneapolis Fed [has estimated]( the lag could be up to 12 months. [Source]( Presumably, they bring this awareness to policy discussions, which incorporate it into decisions. But it’s the government, so don’t get your hopes up. As a cherry on top for the braindead market activity in response, annual shelter costs increased 5.2% in August, “accounting for over 70 percent of the total 12-month increase” in core CPI inflation. If we expand our view even more, we can see that 1) the economy is still doing fine, and 2) conditions are still deteriorating enough to justify cutting in the near future. The slight, recent uptick in unemployment seen above is what’s driving the Fed to start cutting rates. As long as these trajectories remain, the soft landing is still here and has some rates to look forward to. The Takeaway? I know—I’m just as shocked as you to find out the market could ever overreact to something! Seems impossible, given how entirely rational, intelligent, stable, and attractive everyone on Wall Street is. All told, Wednesday’s CPI data triggered a decrease in the odds of a 50bp cut in September from ~1/3rd to just 13%: [Source]( Basically, that’s what triggered the deep selloff we woke up to yesterday. The odds of a 25bp cut now sit at 87%. But maybe if we keep our fingers crossed, the economy will collapse over the next week and justify a 50bp cut. Even more surprising than the overreaction, however, is the rationality that entered around noon. Can’t wait to see what the August PPI does today! What's Ripe Petco Health & Wellness (WOOF) 32.90% - Like when training a dog and it kinda half does the trick, investors are as ecstatic as pet owners on extremely minimal success. Shares are up on mediocre earnings. - Pet spending has become more of a staple than a discretionary item in recent years, with Petco's grooming and vet services unit carrying on 3.1% revenue growth. - Losses came in narrower than expected at $0.02/sh vs the $0.03/sh estimate, driving the strong response despite weakening across literally everything else. Nvidia (NVDA) 8.15% - No wonder Nvidia CEO Jensen Huang is out here signing women’s[… yeah](. The guy is officially a rock star, and he put that on full display on Wednesday. - Speaking at a Goldman Sachs event, Huang addressed questions over whether current GPU demand is sustainable as the AI era moves away from pure model training. - In short, the answer was a resounding “yes,” explaining that it is sustainable due to the growing prevalence of virtual software engineers to build… everything. What's Rotten GameStop (GME) 11.98% - Gaming financial results are the only thing anyone’s playing at GameStop these days, as the company’s surprise profit is entirely attributable to interest income. - GameStop (miraculously) beat bottom-line expectations, reporting EPS of $0.03/sh, while analysts expected a $0.09/sh loss. Sales of $798mn missed by 11%. - Margins deteriorated as SG&A costs declined 16% while sales fell 31% compared to last year. But hey, maybe Roaring Kitty will tweet a meme or some sh*t. Trump Media & Technology Group (DJT) 10.47% - Having been similarly traumatized in the past, I’m not one to laugh at losses. In fact, I think we can sum up TMTG in just four little letters—LMAO. - Shares in the former President’s media “company” plummeted to a new low a day after Trump faced his first-ever coherent opponent in a debate. - I thought it was pretty evenly matched, but the real question is why shares sold off if Trump had a worse-than-usual performance. He’s integral to the firm, and presumably, if he takes the White House, he’d have to leave… so isn’t losing good? - However, this isn’t a normal stock. DJT trades on how cool Donnie Boy is looking that week. Even Biden [putting on a Trump hat]( yesterday couldn’t help… Thought Banana OpenAI’s Alt-ernative Strategy You have to be a little weird to achieve world-class skill in anything. Similarly, you have to be a little bit weird to have enough interest in technology where you can learn to understand AI, ML, and whatever other nerd acronyms there are. So, it’s no wonder that the people behind the premier, world-class AI company are super weird. And their compensation plans show it. What Happened? The weirdo, future rulers of the universe at OpenAI, have an interesting strategy when it comes to employee compensation. In addition to base salaries, many employees get compensated through equity awards like Restricted Stock Units (RSUs), Performance Stock Units (PSUs), profit shares, and many other creative transfers of not-enough pay managers can come up with. [Source]( The thing is, OpenAI’s corporate structure doesn’t really allow that. Essentially, the abomination above functions with OpenAI Global as the profit-seeking, ChatGPT-revenue-recognizing operational arm. The above Holdco is where employees and private investors take capped-profit stakes in the company. And finally, OpenAI Inc. at the top is the “non-profit” Sam Altman and his gang of freaks, who claim control of the decision-making power of the firm to achieve the firm’s mission of “build[ing] artificial general intelligence (AGI) that is safe and benefits all of humanity.” Now that that’s out of the way, let’s talk about what they’re doing. As the firm’s valuation has exploded, everyone wants in. In response, OpenAI isn’t selling traditional equity—they’re essentially IOUs for future profits. “Profit participation units” entitle holders to a certain % of the company’s total profit after a predetermined threshold profit has been reached. For example, if you own an OpenAI PPU, your share of the profit may kick in after, say, $1bn in profits has been made. This is how OpenAI compensates employees and any investors that aren’t daddy Microsoft. PPUs carry no ownership, voting power, or intrinsic value. They only have value if/when a buyer expects the firm to reach a profit above the threshold. Yesterday, TechCrunch [reported]( that OpenAI is looking to raise $5-6bn from outside investors like banks, Thrive Capital, and daddy Microsoft, at a wild $150bn valuation. Much of this is being done through employee sales of PPUs. The Takeaway? Investors are going crazy over OpenAI like hardly anything I’ve seen before. I’m 24, so that might not be saying much, but still. Normally, the risk of equity ownership is bankruptcy, but even then, investors still have a claim on assets, even if they’re last in line. OpenAI’s data centers and IP Global could fetch tens if not hundreds of billions—and none of these investors (except daddy!) have any claims. See? Like I said—weird. The Big Question: Would you buy OpenAI PPUs? Why not just buy shares in Microsoft? Am I missing something? Banana Brain Teaser Previous For each trip, a taxicab company charges $4.25 for the first mile and $2.65 for each additional mile or fraction thereof. If the total charge for a certain trip was $62.55, how many miles at most was the trip? Answer: 23 miles Today At a garage sale, all of the prices of the items sold were different. If the price of a radio sold at the garage sale was both the 15th highest price and the 20th lowest price among the prices of the items sold, how many items were sold at the garage sale? Send your guesses to vyomesh@wallstreetoasis.com ❝ Being right is not the key to investment success. You have to figure out what’s wrong. Howard Marks How Would You Rate Today's Peel? [All the bananas]( [Meh]( [Rotten AF]( Happy Investing, David, Vyom, Ankit & Patrick [Free Month of Access to WSO Company Database]( Share The Peel You currently have 0 referrals, only 1 away from receiving Free Month of Access to WSO Company Database. [Click to Share]( Upcoming Rewards For each referral you drive, you will unlock rewards when you hit milestones. 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