Open AI is raising $122 billion. What comes next? Molly full money starts now. Welcome to Molly full money. I'm Travis Hoyam joined today by Rachel Warren and Lou Whiteman. Guys, the big headline of the end of the day yesterday was that open AI has, I guess, officially now raised $122 billion. I don't think they have all the cash yet, but this is companies like Amazon, SoftBank, Microsoft is apparently back in the game investing in open AI. But Lou, I'm curious about a couple of things. This I think is the biggest, definitely the biggest raise in Silicon Valley, maybe even the biggest raise ever for a company, single raise ever for a company. They're not really close to being profitable. Does this bring an IPO closer? We also have this ARC, the ARC funds are investing. Now, retail is coming in as well, kind of in through a backdoor. What are your thoughts on that? I know it's kind of a big question, but it just seems like they're setting up for this IPO, but yet they still are burning through tons and tons of cash. I think it's important to note that some of this is backwards looking. Some of this is just announcing the close of around where they've announced some of these, or at least it's been reported if they haven't announced it before. So, yeah, a lot of this is just kind of what was coming. Look, you get the IPO, look, to say $2 billion or so in revenue per month. So, figured out on the valuation about 35 times sales. Guys, I'll be honest, I've seen worse. I don't know. I'm not saying- That's so crazy that about that is true. Yeah, but look, theoretically, it's growing, so that's good. A huge caveat with this. Some of Amazon's money is tied to achieving artificial general intelligence. If and when that happens, we'll see. It feels like just lawyer-based. Doesn't it feel like that we're going to end up in court in two years battling over whether or not the AI is actually general intelligent or not? The interesting thing here, though, is trying to figure out what from here. OpenAI wants to go public. Shares already traded on secondary markets. Reportedly, it is hard to find buyers for these shares right now. Anthropic is all the rage. I think that's a better gauge, if true. And again, I'm not on those. I don't know that if true. That is a more interesting data point than basically a press release announcing all of the hard work they've done. To be honest, OpenAI needed the win. It's been a rough couple of weeks for them. Even if this is just them out here beating their chest saying, we're still in this game, we're still in this, look at all this money we have, don't be dismissive of us, maybe that's what they need right now. Yeah, Rachel, what did you think when you saw this? Like Lou said, some of this we knew was coming and we knew they needed a bunch of cash because the projections are just in insane amounts of cash burn over the next few years. It does still seem notable that some of the biggest companies in the world are just throwing tons of money at it. Yeah, I mean, so this funding round values OpenAI at around $852 billion. So you put that in perspective. That's more than the market cap of most blue chip companies on the S&P 500. OpenAI hasn't even hit the public market yet, obviously. We have seen, of course, in the past a bit of a gap between the private market valuation and what a company looks like once they hit the public markets. As Lou mentioned, they're bringing in about $2 billion a month in revenue, but they're looking at a projected $14 billion loss in 2026. They've already said they're planning to burn through about $115 billion in cash over the next few years due to their investments in data centers and artificial general intelligence. So then you're thinking, okay, so how does an IPO make sense for investors? If you're an institutional investor, you're betting on the foundational layer of the entire AI economy. We've seen institutional investors essentially salivating to own a piece of the business. I'm curious about whether that appeal, how that's going to translate to a public listing. So when you're looking at evaluation of this magnitude, a significant chunk of at least near-term future success is already priced in. And so for the stock to really pop post-IPO, OpenAI doesn't just have to succeed. It has to become one of the most valuable companies in history. What would be really interesting is when we see that S1 filing, really pulling back the curtain on their exact margin structures, their compute costs. I think if those disclosures show diminishing returns or even that open-source rivals are eating some of their pricing power, that growth at all cost narrative could sour quickly. So those are some things I'm thinking about right now. Well, the IPO is fascinating because you can game an IPO. This isn't news, right? And we're not talking about anything. For example, one of the reasons SpaceX will achieve their $1.5 trillion or whatever is they are not going to sell a lot of shares. So you can kind of supply based on demand. OpenAI is a very different story. Arguably, even if there's success from here, the buzz is gone. So there are going to be a lot of insiders who are looking for exits. Plus, you have a huge need for money. They're not really positioned to just sell a small sliver because they actually need to raise this money as soon as possible. It's a tough IPO to get right, I think. And yeah, I think that's the next move here if they get there. I wouldn't be surprised, actually, if you see an additional bridge round before then. I don't know if an IPO is looking likely in the at least the next six months for them. That does seem like a challenge, Lou, that they are in this position. We've seen this with companies just back in my history. I mean, I remember Sun Edison was one of the hottest stocks on the market for a little while. But their entire business model was predicated on raising the next round, which was theoretically going to pay off. And that worked literally until it didn't. And OpenAI sort of seems to be in the same situation today where if AGI, you keep moving the goalposts further and further out, AGI is this panacea of cash flow, but we're going to need a ton of cash to get there. If the market rejects that and you go from being a $800 billion company like they are today, and let's say that IPO price is at $400 billion, still one of the biggest companies in the world, that's really problematic. The other thing that I wanted to bring into this was the companies funding them are some of the biggest companies in the world, and they're getting more and more stretched. I'm just looking at Amazon's free cash flow and balance sheet. So they're free cash flow over the past 12 months, less than $8 billion, and that will be negative in 2026, and they have $66 billion worth of debt. You're getting a little bit different story yet. They're like a Microsoft and Google, they have a little bit more cash flow. They don't have the same investments that they need to make in some of their non-data center businesses. But SoftBank is taking out debt to fund these kinds of rounds. It seems like the private markets are stretching to a point that we've probably never seen before. Lou, is that at least a reasonable way to think about it? Because I know we talked on Friday about how would the market react if a company like Amazon said, you know what, we're going to spend less next year. Are we at the point where the market would react positively? That would be probably trouble for open AI. Yeah. We can talk about that later too when we get to some of our other stories too. I think exactly what situation that some of these companies are in right now. You just made the case for why open AI, I'm going to be wrong, and open AI will go public because I do think that there are less options from here on additional private funds. Look, I think the best time for open AI to have gone public was a year ago, and they didn't. Now they're faced with this reality. I think there will be money there for them. That will it be at the levels they need versus some of these venture capitalists facing that maybe the redemption won't be at a profit from this round? That's going to make it really difficult for them to do private funding from here too. I think they're in a bind. I think that's why you're seeing all this press and some pretty dramatic cutbacks. I think they're in a, hey, remember us moment. Yeah. It would be fascinating to watch because like you said, Anthropoc is kind of the bell of the ball right now. All right, when we come back, we are going to get to the other hot stock of the day that is Nike, which is plunging in trading. You're listening to Motley Fool Money. In January of 1915, Ernest Shackleton's ship, Endurance, became encased in the ice in the Weddell Sea. Through determination, grit, and savvy, Shackleton would lead his men through a brutal winter, then over hundreds of miles of Antarctic ice, followed by 800 miles across some of the roughest waters in the world. It is one of the most extraordinary and inspirational journeys in the history of exploration. Find this story and many others at the Explorers Podcast available wherever you get your podcasts or at explorerspodcast.com. Welcome back to Motley Fool Money. Nike is down 14% as we're recording early on Wednesday. They reported kind of ho-hum quarterly report, you know, after the market closed yesterday. This isn't a company that's really been knocking it out of the park for a while now, but revenue was flat. Constant currency sales are actually down. Rachel, what did you see and what is the market just kind of rejecting today? Yeah, I think the market is somewhat losing patience with the grueling multi-year restoration of the business that CEO Elliot Hill is still spearheading. So this was their Q3 report. Revenue was a little over 11 billion, earnings per share, 35 cents. Both of those were actually a slight beat compared to what analysts were looking for. But I think what we're seeing in terms of the market's response, which I think is close to an eight-year low at this point, really reflects a lot of kind of deep anxiety over their upcoming guidance. So they're projecting a 2% to 4% sales decline in this upcoming quarter. And that's also against the backdrop of a 20% anticipated revenue drop in greater China, which has been a significant market for them. We're also seeing a time where management is intentionally pulling back inventory of some of their classic footwear franchises to try to clean up the marketplace. That's putting pressure on some of the numbers. There's also margin pressure from tariffs. That is still a notable factor for a business like Nike. So there are some kind of pockets of resilience that maybe suggest a bit of a U-shaped recovery for the business. The performance-running category has been making strides, so to speak, North American wholesale business as well as Nike's really kind of re-embracing its former relationships with its retail partners. Management is expecting positive gross margins by Q2 of their fiscal 2027. I think for now, though, we're really waiting to see, and I think this is the market's sort of tepid response to their results showing that, how can Nike out-innovate rivals like Onholding and Oka while managing a lot of the trade costs and other headwinds they're facing as a business right now. I think we still need a few more quarters to see how that's all going to shake out. Lou, the fascinating thing here is I've analogized them to Under Armour, which is not a flattering analogy. But if you look at this, Nike's stock first passed the $45 stock price in 2014. The stock has gone nowhere for 12 years. We're in a 74% drawdown as we're recording. And still, shares are trading for 30 times earnings and 30 times forward estimates. We've talked about a couple of target before, where they can't seem to do anything right. But then you look up in the stock trades for 10 or 11 times earnings, and you go, I may find some value in that if they can turn things around. This has still got to be a huge turnaround for Nike, and it just doesn't seem like it's sticking. Yeah, we like to talk in terms of hot takes are our job. And we like to say things like they're doomed, they're a success. A lot of times, the truth is the boring middle. Nike is fine as a company and is just not interesting as a stock. And both of these things are true. For all the gloom and doom, it's a profitable company generating $45 billion in annual sales, anemic growth, but growth. It's not going anywhere. There is a turnaround plan. I don't think it's going to be like the rocket ship from the 80s again, but there is signs that the turnaround plan is working. It's just not an attractive investment. And to your point of valuation, I don't know what it could be. We talk about they have to out-innovate on holdings, but the point is that on holdings exists. It used to be that with your muscle and marketing, Nike could just flood the market and dominate. That was before Instagram. That was before TikTok. One good influencer can get you in the game now, especially for a niche or a sport. The world has changed in ways that don't benefit Nike. I'm not saying it can't continue on as a company. I'm not saying that it won't be the biggest seller of athletic shoewear from here. I think it could be. I still don't think it's going to get my attention as an investment. It is fascinating how this has changed as those supply demand dynamics. The interesting thing I saw in the report was that they're actually gaining share in wholesale. That was up nicely mid-single digits, but their direct-to-consumer is down. So the strategy that they put in place when the pandemic started and what you think these companies would like to be growing is that building that direct relationship to customers just still not clicking. And to be fair, that is intentional because that is what they said that, okay, we overdid that. We have to get back in good graces with wholesale. So it is partially intentional whether or not it's a good long-term strategy. We'll see. Yeah. And still they've lost a lot of that shelf space to the companies like we've been talking about. All right. When we come back, we're going to go back to artificial intelligence and Oracle's news. You're listening to Motley Fool Money. Every Sunday we recap the week's tech news with the smartest people in the business. Joining me this Sunday, Kathy Gellis, attorney at law, Harper Reed, AI guru, and Brian McCullough from the Tech Brew Ride Home. We'll talk about the big meta social media decision. Is it the end of the line for social media? We'll talk about AI and why you should give your AI agent some free time and a whole lot more. Look forward to Twitter.tv or wherever you get your podcasts. Welcome back to Motley Fool Money. Oracle is back in the news this time for maybe not great reasons. 30,000 people have lost their jobs. I think all those notifications went out. Yesterday as we were recording, this has just been an absolutely crazy ride for Oracle. We went back and looked. Remember that announcement that seems like it was 10 years ago? They added $300 billion worth of remaining performance obligations. A lot of that was coming from open AI. Shares stock popped on that news. Shares were up 30% in a day or two. They're now down 40% since before that announcement. The market is rejecting what their new strategy shift is, Rachel. It seems fascinating that they're now saying, you know what, we're still going all in on AI and we're going to sacrifice the jobs that have gotten us to be the company that we are today. Yeah, that's right. These reports of about 30,000 layoffs, it's staggering. The number I saw, it's about 18% of their global workforce. They're very much caught up in a high stakes AI arms race, if you will. They've committed $50 billion in CAPEX for fiscal 2026 to build up the data centers needed for clients like Open AI and NVIDIA. They beat expectations on the top line in the recent quarter, but they're dealing with negative free cash flow. These job cuts are expected to free anywhere between $8 billion to $10 billion in annual cash flow. That's very much a calculated move, I think, to perhaps satisfy Wall Street's mounting anxiety over their debt load, so to speak. I think it's also an interesting question. Is Oracle fundamentally trying to change its business model from a high margin software provider to a capital intensive AI landlord? That's sort of what we're seeing. We saw Oracle's stock jump immediately following the layoff news, but as you noted, Travis, shares are still down significantly from recent highs. I think what we're seeing as well is they're essentially betting the house that AI cogeneration is going to allow the company to build more software with fewer people and justify that human cost as a necessary step to fund their $300 billion partnership with Open AI and other partners. They've proved they can cut costs, but now they have to prove that they can convert that AI backlog into actual profit before that debt service becomes unmanageable. Yeah, Lou, it seems like Larry Ellison is going big or going home with this bet on AI. Yeah. I don't honestly know what's going on here. I think six months ago, if you announced this because our AI is so great, the market might be cheering it. And again, now there's the skepticism. Look, all of these companies overhired during COVID, I do think some of this is just the smoke screen, using the smoke screen of AI to kind of right size, but everything said here, they have a ton of capital commitments coming up. A lot of the revenue sources is Open AI. A lot of that RPO, so there is real questions about revenue, so they do need to cut corners. Interesting thing, Travis, and we kind of hinted at this before Open AI. I think right now, game theory would suggest that even if any of these hyperscalers are having second thoughts, their most rational move is to keep spending. And we can deep dive on that if you want, but even if you think it's a mistake, you almost have to keep spending right now. And I wonder if that is true. We don't know that's true. Maybe they don't see it as a mistake. The whole premise might be false, but it could be a period of really weird kind of volatile decision making if that's the case though for these companies. So you're saying that let's take Google as an example. Hey, if we overbuild, we would be better off overbuilding in artificial intelligence and data centers and GPUs and all that kind of stuff, rather than underbuilding and missing out on the opportunity, but then you look at it flip side like Oracle and they're building with debt. So it seems like the calculus is just very different. And if they have to keep up with those other bigger hyperscalers, they just don't have the fallback. That's what seems to be the challenge to me is that if Google spends all their cashflow for the next three years and then realizes it's not a great return on investment, they can just reverse course and they'll be fine. Microsoft will be fine. Shame on them. Amazon will be fine. Right. I think that's part of it. But look, very simple. They have all said we are pursuing this because it is the future. If they all blink together, it would be fine. But if one of them blinks, even if everybody's seeing the same thing and even if it's the rational move, I think the read will be ours isn't as good as everybody else's or we have failed. And so I do think that just the short term decision making matrix is to keep doubling down even if you had doubt until there are clear signs that your competitors are like if they can all get in a room, what would they actually talk about? Who knows? But I don't think that's going to happen. It just kind of sets up. There could be remarkably bad decisions made where 10 years from now you look back and say what were they thinking? I'm trying to get at maybe what they were thinking. Yeah. The other thing that we need to think about as investors is the market is starting to send those signals. And the market is, we talked about it on the Friday show, management teams are going to have to start thinking about, hey, if we cut back, is the market going to cheer? Because if you've got a crashing stock price, eventually somebody's going to lose their job and implement a different strategy and they're going to look like a hero. So a lot of game theory, as you said, going on in Silicon Valley right now, we're fascinated to follow over the next few years. As always, people in the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows the Motley Fool's editorial standards. It is not approved by advertisers. Residents are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Rachel Warren and Dan Boyd, Behind the Glass, I'm Travis Holm. Thanks for listening. We'll see you here tomorrow.
