Are AI Valuations Inflating a New Tech Bubble?

There may be errors in spelling, grammar, and accuracy in this machine-generated transcript. Blake Oliver: [00:00:04] Investors are applying the wrong lesson of the last boom. The the.com boom. They're thinking that OpenAI is Facebook or that anthropic is Google. And so far they haven't built anything that is defensible. David Leary: [00:00:24] Coming to you weekly from the OnPay Recording Studio. Blake Oliver: [00:00:30] Hello and welcome back to the Accounting Podcast, your weekly roundup of news in the profession. I'm Blake Oliver. David Leary: [00:00:36] And I'm David Leary. I'm Blake. Neither of us are in our normal studios today. Blake Oliver: [00:00:40] No, we're on the road. You're in Palm Springs for the Association of Accounting Marketing Summit. David Leary: [00:00:48] It's the. They actually, it's a m summit, but they pronounce it AME. I never knew that until I came to this conference. They call it AME. It's AME summit. Uh, but breaking news as of like 3 or 4 minutes ago. They've rebranded Blake. They just announced this. It's not going to be called Association for Accountant Marketing anymore. So drum roll it's going to be called Association for Accounting Growth A A G. And it's about elevating careers and advancing firms. So because I noticed when I was here, it wasn't just marketers. You got a lot of like the, the sales bros, guys at firms, the rainmakers are here, you know, those types of people. So it's more than just marketing accounting firms. It's people that are helping accounting firms grow ultimately. So they've, they've evolved their mission and their brand. Blake Oliver: [00:01:29] I guess this week I'm headed to New York. I'm going to Nasdaq Tower in Manhattan for the black or AI summit. And I'm hosting a panel really excited to be talking about AI and see what black is doing there. Another one of those AI tax prep companies, they came out of stealth recently, and this is their first big event, and they've got thought leaders from all over the profession coming reporters as they like. David Leary: [00:02:00] Personal personal returns. Business returns both what is there? Blake Oliver: [00:02:04] They're doing both. They started with the ten 40s like everybody. And I'm really excited to see like what they're doing and hear the discussion from the execs. Accounting Today is going to be there. Apparently a Wall Street Journal is going to be there as well. So I'm excited to go and host a panel. And my panel is all about, uh, how firms are implementing AI today. It's the how to part. Uh, and Jim Bork from Withum is going to be on the panel and he's one of the top guys, uh, in the profession who's actually leading AI inside of a big firm. So I'm really excited to talk to him. We'll talk more about AI today. There's a lot of news. Elon Musk lost his lawsuit against OpenAI on a technicality, clearing the way for an open AI IPO, perhaps this year or next. Uh, I have thoughts about this? Are we in a bubble? And I think we are finally. David Leary: [00:03:00] Caught up to my thinking. You finally caught up to my thinking. Good. Blake Oliver: [00:03:03] So? Well, just because it looks like a bubble doesn't mean it is one. But I think there's an accounting tie in to this. And there's an accounting reason. You have the. David Leary: [00:03:11] You have the numbers to prove it. Blake Oliver: [00:03:12] Now. That's right. But first, David, let's thank our sponsors who are the sponsors for this episode. David Leary: [00:03:18] Sponsors. This week we have digits. We have our cost seg on pay and maxima. Blake Oliver: [00:03:23] Let's be honest, accounting software hasn't changed much in decades. The prices keep going up, but the software still expects you to do all the work. Digits is different. 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And welcome to our live stream viewers. Boring accountant is here with five coffees today. I'm caffeine caffeine caffeinating as well. I'm on number two R cola. Great to see you as well and sing one is called has joined us as well. I think you're new to the YouTube live stream, so welcome. David Leary: [00:04:55] And I was just about to say we should thank our other sponsor for making this episode possible. They T-Mobile because I was on my hotspot, but somehow it's not on hotspot anymore. It's back on the conference Wi-Fi, so fingers crossed that we don't get a disconnection here. I don't know how it like it's shift, you know, it just grabs whatever Wi-Fi I can find, apparently. So hopefully we don't lose a connection today. Blake Oliver: [00:05:14] So I mentioned at the top of the show that Elon Musk lost his lawsuit against OpenAI. He was suing OpenAI to prevent them from converting to a for profit structure. Uh, the jury decided that Musk waited too long to file his lawsuit because he knew about the shift as far back as 2017, but didn't file the lawsuit until 2024. Past the statute of limitations, OpenAI argued in the in the in the case that Musk once wanted 90% of the company equity for himself and only turned against them after they refused to give him control? This verdict clears the way for an open AI IPO, which they wouldn't have been able to do if Musk had managed to prevent this shift to a for profit status. Company recently raised 122 billion, which is the largest funding round in Silicon Valley history. And so if and when they do IPO, it will be enormous. And this is one of those things that's making me start to think about whether or not we are in an AI bubble. David Leary: [00:06:20] Before you go to the bubble conversation, I have a question to a story. A long time ago, you kind of covered this when they decided they wanted to make the move from a nonprofit to a profit corporation, and ultimately, they have been paying taxes right up to that point. And I remember you kind of like you created a whole PowerPoint slide, like diagramed it all out. And it's part of these new court proceedings. Is there anything addressing like the back taxes they're going to have to pay when they. Blake Oliver: [00:06:45] Well, I mean, they've been losing money, right? They've been burning cash. So there's no profit. David Leary: [00:06:49] I guess. Blake Oliver: [00:06:50] Okay, I guess so. Shifting to this structure will allow them to, um, I mean, like there weren't any profits when they were a nonprofit to, to deal with the issue is the ownership. So the nonprofit is getting a huge chunk of the for profit company, but not all of it. So basically it's give a big chunk of the equity to the nonprofit and the rest goes to the investors. Uh, and there's going to be so much money if they do IPO that nobody cares if the nonprofit gets like hundreds of billions of dollars or whatever it ends up being. And that's how they worked around this. Um, so let's talk about this bubble. Let's talk about whether or not we're in one, just because valuations are soaring and IPOs are forthcoming. And there's this new technology doesn't mean we're necessarily in one. But there's something about the accounting that makes me think we are Because, uh, let's just think about how this is working, right? Companies like OpenAI and anthropic raising all this money, where is it coming from? A lot of this money is coming from big tech, Amazon, Microsoft, Amazon, in particular, investing in anthropic, Microsoft investing huge sums in OpenAI. And often they're not actually giving these companies cash. What they're giving them is cloud compute credits, because what is the biggest expense of these MLM companies? It's cloud compute, compute to train the models and then compute to run the models for their customers. Openai has an 852 billion valuation with an annualized run rate of about 25 billion. But they are burning about 17,000,000,000 in 2026. That's the estimate. So they're burning cash and it's far in excess of their revenue. And they've got this huge valuation. And you know that's a multiple of like 3435 times annualized revenue. By comparison, a mature software as a service company will trade for multiples of 5 to 10 times annual recurring revenue. So even if you believe that open AI can can generate revenue to justify its valuation, you're, you're you're betting a lot, right? This is a very highly valued company based on their recurring revenue. David Leary: [00:09:33] And some of the argument is the recurring revenue is really low right now because they're kind of subsidizing. It's like $6 Uber rides. Remember, you're all taking those. It was very money was cheap and it was getting subsidized like, like. So that's people think eventually they're going to have to raise prices and then the revenue will come up just from that naturally. Blake Oliver: [00:09:49] Right. And these companies are competing with each other on the price at the moment, because if they did raise prices, companies might switch. And like one of our livestream viewers just said, it sounds like a utility, Christopher said, it sounds like a utility. And I'm starting to think that as well. So there'