This year could be a big one in the world of IPOs. One of the biggest companies to potentially go public in 2026 is OpenAI, the company behind ChatGPT. It's an enticing opportunity for investors to snag shares of what's become one of the most exciting companies in recent years.
Meanwhile, artificial intelligence (AI) stocks have been coming under pressure this year. Many of them have been coming off some terrific gains in recent years and may arguably be due for some adjustments in their valuations. Tech giant Nvidia (NVDA 5.93%), for instance, is up around 1,200% in just the past five years.
Are you better off holding off on investing in Nvidia or any AI stocks right now and instead just buying OpenAI stock when it becomes available?
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Would OpenAI be worth a $1 trillion valuation out of the gate?
OpenAI recently raised $122 billion in a funding round that valued its business at a whopping $852 billion. By the time it goes public, potentially later this year, it may be valued at around $1 trillion. The big question, however, is how much demand there might be for the stock at that kind of a valuation.
There are two big issues that I see with OpenAI right now.
The first is profitability -- it has none, and it may not turn a profit for multiple years. And there's no guarantee that will be a certainty. It recently announced it would be shutting down Sora, which creates videos, likely to curb its costs and focus on improving its bottom line. The company's ambitious growth opportunities may be enticing, but they can also be quite costly.
The second issue is that there's not much evidence of any moat or strong competitive advantage. It's hard to argue that OpenAI has a strong, defendable competitive advantage that would allow it to dominate in a world that's increasingly clouded by other chatbots. Not only are big tech companies launching their own chatbots, but there is also no shortage of competition abroad from Chinese companies, which may have leaner, more efficient models.
Investors are better off going with safer, proven names in the tech sector
Every IPO isn't a success, and with OpenAI's valuation already sky-high, buying the stock when it goes public may not yield strong returns for investors. At the very least, you'll want to take a closer look at its financials, when they are released, to gauge just how good and safe an investment it really is.
Nvidia and other AI stocks may not be as flashy as they are today, but they can make for better long-term investments. With Nvidia, for instance, you know you're getting a top tech stock with terrific financials, excellent market share in the AI chip market, and which has a bright future ahead. In just its past four quarters, the company has generated a staggering $121 billion in profit. While its valuation may seem high, at a market cap of $4.3 trillion, the stock itself trades at 36 times earnings, which may not be unreasonable for the leading tech giant.
NASDAQ: NVDA
Key Data Points
Chasing the latest tech trend or IPO can be dangerous, while investing in companies with proven track records and strong financials is often a far better move in the long run.
