Artificial intelligence (AI) companies are trading at “eye-popping valuations” as investors try to get in on this rapidly advancing technology early, analysts at Deutsche Bank Research believe.
“If you think Nvidia Corp (NASDAQ:NVDA, ETR:NVD)'s shares are expensive, take a look at how much investors are shelling out for a stake in the private companies at the heart of the AI frenzy,” they wrote in a note to clients.
“Sometimes it seems like there’s a unicorn born every minute.”
The bank’s analysts pointed to a deal completed this week by ChatGPT maker OpenAI, raising $6.6 billion from investors including Thrive Capital and partner Microsoft Corp (NASDAQ:MSFT) to give the firm a valuation of $157 billion.
With Open AI on track to generate about $4 billion in annual revenue, that values the company at a multiple of almost 40 times its gross sales.
Other companies like Anthropic and Elon Musk’s xAI have also seen skyrocketing valuations, despite generating relatively modest revenues.
Despite the eye-watering valuations, many of these AI startups are running at significant losses, largely due to the cost of training their models on hardware from Big Tech firms.
Nvidia and Microsoft, which are profitable, are trading at comparatively conservative valuations, analysts pointed out.
“Nvidia, which is expected to generate around $160 billion in sales over the coming four quarters, and around $90 billion in profit, weighs in at a price to blended forward 12 months sales ratio of a mere 18, though its price to trailing sales is 30,” they wrote.
“Microsoft, OpenAI’s biggest investor and server supplier, is only in the low double digits.”
However, the analysts noted that the newest AI startups are hitting revenue milestones much faster than older tech companies, with the top 100 startups reaching $5 million in revenue in a median of 24 months.
There is also hope for public market opportunities following a two-year dearth of big tech IPOs. Companies like Cerebras Systems filing for IPOs could ignite a new wave of AI investment, the analysts wrote.