Key Points
This year has been a massive one for initial public offerings in the tech space, from Cerebras Systems‘ operation in May to Space Exploration Technologies‘ IPO early this month. Cerebras, raising $5.5 billion, was the biggest year-to-date — and then SpaceX, raising $75 billion, completed the world’s largest. (That number increased to more than $85 billion after SpaceX’s underwriters exercised an overallotment option.)
Anthropic, the artificial intelligence (AI) lab behind the Claude model, and OpenAI, known for ChatGPT, each filed confidentially for IPOs in recent weeks, too, allowing investors to imagine operations for them at some point this year. Still, these players didn’t announce potential dates or further details.
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And now, the latest news suggests OpenAI’s operation may come later than investors were expecting. OpenAI is considering whether it should delay its IPO until next year in order to have a better chance of attaining a $1 trillion valuation, according to The New York Times. Should this move prompt you to worry about AI stocks? Let’s find out.
Image source: Getty Images.
OpenAI: a key player in the AI boom
So, first, a bit more detail about the OpenAI situation. OpenAI has been one of the key players in the AI story, thanks to the popularity of ChatGPT. The company is seen as one of the main drivers of this revolution and has gained the support of one of the world’s biggest tech companies: Microsoft has invested about $13 billion in OpenAI. And OpenAI in March completed a record funding round of $122 billion to reach a valuation of $852 billion.
For quite some time, investors have been anticipating an OpenAI IPO and watching eagerly for a filing. The company partially satisfied that curiosity a few weeks ago when it said that it confidentially filed with the Securities and Exchange Commission. A confidential filing means the company hasn’t yet made its financial statements available to the public and has only offered them to regulators for an early review.
OpenAI didn’t set a date for its IPO or even offer any general time frame, but given the timing of the confidential filing, investors speculated that it likely would happen in the coming months. Last week, though, The New York Times, citing people familiar with the matter, said OpenAI is considering a delay, pushing the potential IPO to next year when it may obtain a higher valuation. The newspaper mentioned the path of SpaceX stock, which has declined from its post-IPO peak.
AI stocks have encountered pressure
Now, let’s consider our question: Should this move by OpenAI prompt you to worry about the general AI market and AI stocks? It’s true that AI stocks have encountered some pressure, not just recently but even as far back as last year. At that time, investors worried about the sky-high valuations of some — in most cases, those valuations have come down to reasonable levels.
Meanwhile, concerns about the high spending by tech companies on AI have surfaced periodically. But companies, in their earnings reports, have demonstrated that demand for AI products and services remains high, justifying investment levels.
Still, with AI stocks soaring for the past few years, some investors are simply worried that such a pace can’t continue forever — and may result in a decline in the months or quarters to come.
What quality stocks are known to do
Of course, stocks never rise in a straight line forever. So, at a certain point, stocks that have soared — such as AI players — will decline by a certain degree. Unfortunately, we don’t know when that will happen. It’s impossible to predict with 100% accuracy. But here’s the good news: Quality stocks over time always have gone on to recover and gain over the long term. And I expect this to happen in the AI space too.
What this means is, it’s crucial to invest in AI companies that have strong competitive positions, the financial strength to manage headwinds, and great long-term prospects. The development and use of AI doesn’t look like it’s seen its final days. In fact, we actually may be in the early days of this AI growth story — even if the market drops at a certain point, these companies could see a fresh wave of growth in the months and years to follow.
So, whether OpenAI’s potential delay signals a turbulent time for AI stocks or not, don’t worry. If you hold a number of quality stocks, ideally as part of a well-diversified portfolio, they may weather any potential storm and deliver over the long term.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.