🎙️ Dumb Money Live: The Backdoor Bet on OpenAI

How Microsoft Could Become the Unexpected Winner in the AI Revolution

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In the rapidly evolving landscape of artificial intelligence, OpenAI has emerged as the undisputed leader, with ChatGPT becoming synonymous with AI much as Google did with search. For investors, however, the challenge has been clear: OpenAI remains a private company, accessible only to accredited investors with the right connections. In this episode of Dumb Money Live, the hosts unveil a compelling "backdoor" strategy for gaining exposure to OpenAI's potential through a publicly traded company: Microsoft. This analysis explores the intricate relationship between these tech giants and the catalyst that could trigger one of the most significant valuation events in recent market history.

OpenAI's Unprecedented Dominance

The episode begins by establishing OpenAI's remarkable position in the AI ecosystem. As the hosts note, "OpenAI is pretty widely considered to be the leader in AI right now. ChatGPT has basically become synonymous with AI, the way Google became a verb for search." This dominance is reflected in staggering metrics:

Growth Velocity: ChatGPT has maintained the #1 position on the App Store daily for six months, with competitors hovering between positions 25-100.
Revenue Trajectory: OpenAI's revenue run rate has surpassed $10 billion annually, with projections suggesting it could approach $20 billion by year's end.
Market Share: The company commands approximately 80% of the global AI market, creating what the hosts describe as "two different universes of companies" between OpenAI and its competitors.

For context, the episode contrasts OpenAI's performance with competitors like Anthropic (approximately $4 billion annual run rate) and Elon's XAI (reportedly around $100 million annually). This vast gap in both adoption and growth has created intense investor interest in accessing OpenAI's potential upside.

The Investment Challenge: OpenAI's Private Status

The central problem for most investors is straightforward: "OpenAI is a private company. And yes, OpenAI is actively fundraising. So if you're an accredited investor and you have a network of venture buddies, and in reality, you're on a group text with Sam Altman, you probably can find some shares or an SPV to get a piece of the action. But what about everyone else?"

The hosts reveal their own attempts to invest directly in OpenAI, including raising a $5 million fund earlier in the year and currently trying to place $250 million unsuccessfully. They describe the process as "torturous," with rounds constantly changing and valuations escalating rapidly, from initial discussions around $260 billion pre-money to a planned reopening at a half-trillion-dollar valuation.

This exclusivity has created a significant opportunity cost for retail investors who recognize OpenAI's potential but lack access to direct investment channels.

Microsoft's Strategic Position: More Than Just an Investment

The episode's core thesis centers on Microsoft's unique relationship with OpenAI. While many investors are aware of Microsoft's reported $10+ billion investment in OpenAI, the hosts argue that the current arrangement is just the beginning of a much more significant relationship.

Key aspects of Microsoft's current position include:

Revenue Sharing: Microsoft receives approximately 50% of OpenAI's revenue until their investment is repaid 10x over—potentially amounting to $120 billion in revenue share.
Infrastructure Dependence: OpenAI's models run primarily on Microsoft's Azure cloud, creating a symbiotic relationship.
IP Licensing: Microsoft has extensive rights to use OpenAI's technology across its product suite, including Office and other Microsoft products.

However, as the hosts emphasize, "Microsoft does not own an equity stake in OpenAI and they don't own any of the IP. That's all a licensing deal." This distinction is crucial to understanding the potential catalyst ahead.

The Coming Restructuring: A Catalyst for Massive Value Creation

The episode's most compelling insight revolves around OpenAI's planned restructuring and its implications for Microsoft. OpenAI is in the process of converting to a "Public Benefit Corporation" structure while maintaining its nonprofit parent, a move that requires resolving its complex relationship with Microsoft.

The hosts outline several critical factors driving this resolution:

Financial Pressure: Sam Altman needs every dollar of revenue to reinvest in the business. "He cannot afford to pay Microsoft 50 cents on the dollar of the first quarter of a trillion dollars of revenue he gets. That would be harmful to the growth of his business."
SoftBank's Contingent Investment: Of SoftBank's reported $40 billion commitment to OpenAI, $20 billion is contingent upon the company's restructuring and resolution of the Microsoft situation.
Timeline Pressure: These negotiations must conclude by year's end, creating a narrow window for the market to reprice Microsoft's potential exposure.

The hosts speculate that Microsoft will likely receive between 20-50% equity in OpenAI as part of this resolution, with their "base case" being approximately one-third ownership.

The Valuation Implications: A Potential $165 Billion Windfall

If Microsoft were to receive one-third of OpenAI at the planned $500 billion valuation, it would represent an equity stake worth approximately $165 billion. As the hosts note, this would be "a grant of equity to Microsoft that is valued at call it $165 billion."

To put this in perspective:

Historical Context: The hosts reference Google's $8 billion markup on SpaceX shares in a previous quarter, which "completely saved Google's quarter."
Scale Comparison: A $165 billion markup would be unprecedented in scale, more than 20 times larger than Google's SpaceX benefit.
Market Impact: Such an event could significantly boost Microsoft's market capitalization and potentially trigger broader market enthusiasm for AI-related investments.

The hosts emphasize that this isn't merely theoretical: "I cannot comprehend a scenario where a deal doesn't get done because the incentives are too strong and the penalties are too strong."

The Investment Thesis: Timing and Positioning

Recognizing the potential catalyst, the hosts discuss their approach to positioning for this event:

Equity Foundation: "I have an equity position in Microsoft. And then I have a variable leverage position in Microsoft that I'll take up and down over the course of the rest of the year, dependent on the likelihood of what I think we might hear."

Event-Driven Strategy: The hosts advocate for a "prepared mind" approach, setting alerts for key developments and being ready to act when information emerges: "You have to be prepared to put on this trade and you have to be watching this story unfold so that the second it starts to materialize, and by the way, we're not saying to make this trade. This is how we're thinking about it."

Information Monitoring: The key is to watch for leaks or official announcements regarding the Microsoft-OpenAI resolution: "I want to be early because I see it playing out, I see it clearly, and I don't want to miss it because I love these situations where the hottest company in the world is uninvestable."

Risks and Considerations

While the thesis is compelling, the hosts acknowledge several important risks and uncertainties:

Valuation Concerns: At a $500 billion valuation, questions arise about whether OpenAI is overvalued, especially given its current revenue run rate of $10-20 billion.

Dilution Risk: If Microsoft receives equity, existing shareholders could face dilution, though the hosts argue this would be more than offset by the value of the OpenAI stake.

Timing Uncertainty: The resolution timeline is not guaranteed, and delays could extend beyond year-end.

Competitive Threats: The episode notes recent developments like Amazon hosting OpenAI models, which could pressure Microsoft's cloud advantage: "I knew that that would be a negative story short term for Microsoft, so I took off the Microsoft trade."

Regulatory Scrutiny: Such a significant transaction could attract regulatory attention, potentially complicating or delaying the arrangement.

The Bigger Picture: AI Supercycle Implications

Beyond the specific Microsoft-OpenAI thesis, the episode places this development within the broader context of what they call the "AI supercycle":

"We've been saying it for two years. This AI supercycle, we might not see something like this again for the rest of our lives. So if you're an investor, you need to be digging in to this super cycle and figuring out how you want to play it."

The hosts suggest that Microsoft's potential ownership of OpenAI could position it as "the public market beneficiary" of AI's exponential growth, potentially becoming "the largest company in the world before long" with Microsoft owning a significant portion.

Implementation Strategy for Investors

For investors looking to act on this thesis, the hosts recommend several practical steps:

Education and Research: "You have to do your own research, and then you need to kind of figure out how you want to play it, if you want to play it."

Alert Setting: Monitor key terms, people, and developments related to OpenAI's restructuring and Microsoft negotiations.

Position Sizing: Consider both core equity exposure and tactical options positions based on your risk tolerance.

Patience and Discipline: Recognize that timing is uncertain and maintain the flexibility to adjust positions as new information emerges.

Broader AI Exposure: Consider complementary positions in other AI beneficiaries while acknowledging Microsoft's unique position.

Conclusion: A Once-in-a-Generation Opportunity?

The episode concludes with a powerful framing of the opportunity: "Imagine if OpenAI goes public at like 2 trillion, and Microsoft gets like a $700 billion mark up on that. That's just, that's nuts. It's possible, though. It's definitely possible."

This potential backdoor investment in OpenAI through Microsoft represents is an opportunity to gain exposure to what may be the defining technology shift of our era. As the hosts emphasize, the key is awareness and preparation: "I wanted to clearly surface it for our community because not enough people are talking about this. And it's big. It's really big."

For investors who have felt locked out of the AI revolution, Microsoft's potential equity stake in OpenAI could provide the most accessible, and most significant way to participate in the future of artificial intelligence. As with all investments, the risks are substantial, but so too is the potential for asymmetric returns in what may prove to be a transformative period for technology markets.

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