OpenAI's Revenue Doubled. Its Business Model Is Still Unclear

Your daily market update in 10 minutes. My name is Zayd Admani and today is Friday, August 14th. In today's episode, we'll break down the good and bad news coming out of OpenAI. We'll also tell you why Nintendo is getting a boost from Pokemon. Then stick around to the end of the show to find out how much money the Knicks made from their championship run this summer. We got a great show for you today. Let's go. Well, guys, the stock market is officially back at record highs. The S&P 500 jumped 0.7% yesterday, hitting a record high. This was the S&P's 27th record close of the year. The Nasdaq also had a strong day, rising 0.8%. Now, the reason for this rally is that inflation is cooling. We covered the CPI and PPI reports this week, both coming in below expectations. Those two reports are now changing the conversation on what the Federal Reserve might do with interest rates. Not too long ago, there was real chatter that the Fed could start hiking rates at the September meeting because inflation was heating back up from higher energy prices due to the Iran war. Fed Chair Kevin Walsh was talking tough on inflation in both of the Fed meetings so far under his tenure. But now, the market seems to think the Fed might hold off on hiking rates until later in the year. That could also be the reason why AI stocks are surging right now. The SOX Semiconductor Index has gone up almost 20% since its lows from July. And, you know, NVIDIA has gone up almost 20% as well, not to mention names like Corweave and Nebius have gone up more than 70% from their lows in July. And speaking of Nebius and the AI trade, I recorded an awesome conversation with Gil Loria. He's a longtime Wall Street analyst. We talked about the AI trade, including his thoughts on neocloud companies like Corweave and also NVIDIA, Palantir, and Micron. This might have been one of my favorite conversations that I've recorded so far this year, so definitely check that out. The episode will be posted on Sunday, so keep an eye out for that. And maybe consider hitting the notification bell so you're notified as soon as the episode goes up. Let's run through some headlines, starting with OpenAI. There's been a ton of OpenAI news over the last few days, some good, some not so good. So let's start with the good news first. Bloomberg is reporting that OpenAI's revenue run rate has crossed 40 billion dollars. So what that means is that if OpenAI keeps generating revenue at their current pace for the full year, it would bring in more than 40 billion dollars. And OpenAI's run rate has basically doubled since the end of last year when they were running at around 20 billion dollars. And here's the part that stood out to me. According to the same Bloomberg report, OpenAI's revenue run rate jumped more than 20% just in the month of July. A lot of that growth is coming from their coding and AI agents along with their enterprise customers and even their new advertising business. Speaking of AI agents, I've been messing around with their Codex app and I gotta say, it is pretty powerful. You can do a lot of cool stuff with it and I'm just scratching the surface here. OpenAI also recently released their 5.6 model, which is pretty solid. And rumor has it that they're on the verge of releasing their next frontier model pretty soon. So that's all the good news from OpenAI. But there is some bad news though. The big thing is that OpenAI is going through a pretty significant leadership shakeup right now. Longtime executive at the company, Brad Lightcap, announced this week that he's leaving after eight years at the company. And then yesterday, Chief Revenue Officer Denise Dresser announced that she's leaving after being at the role for less than a year. And this leadership shakeup is coming at a time when OpenAI is planning to IPO soon. Remember, OpenAI confidentially filed for an IPO back in June and according to their last funding round, So this upcoming IPO is going to be massive. And the fact that these executives are leaving right now is pretty weird. But I'm not sure how much to read into this. Is it a sign that OpenAI's underlying business model isn't fully ironed out yet? What's happening recently is that AI is getting cheaper thanks to the rise of Chinese open weight models from companies like DeepSeek and Moonshot AI. A lot of companies these days are starting to use these Chinese AI models for some workflow to cut down on their AI bill. So I think that's the biggest question right now surrounding OpenAI ahead of their IPO. Like, are they actually able to generate a profit and justify a trillion dollar valuation if the price of AI keeps dropping? I mean, sure, OpenAI is growing incredibly fast, but they're also spending an insane amount of money on chips and data centers. So if competition keeps forcing them to slash prices on their models, could they theoretically have a huge revenue growth without necessarily making meaningful profit? We'll have to see how this all plays out. I can't wait to read through their S1 when it drops. So hopefully that drops pretty soon. The rumor, though, is that OpenAI will probably wait until next year before they actually IPO. Let's shift gears and talk about Nintendo. Nintendo is getting their mojo back. The stock is getting a boost today, up 7% in Japan after the company reported that Pokémon Pokopia has sold more than 5 million copies. Pokémon Pokopia is an exclusive game to the Nintendo Switch 2. In fact, it's now the second best-selling game on the Switch 2 behind Mario Kart World. And you know, Nintendo really needed this win because the stock had fallen 28% in the seven months through July as rising memory chip prices squeezed their margins and even forced the company to raise the price of the Switch 2. But strong earnings from earlier this month, plus the Pokémon Pokopia news has the stock up more than 20% in the past month. And I think this just shows you that Nintendo's real competitive advantage is their IP, like Pokémon. I mean, Pokémon is making a big comeback right now, especially with these Gen Alpha kids. My 70-year-old daughter and all of her friends are obsessed with Pokémon cards and merch right now. In fact, Target said that their trading card sales had jumped nearly 70% last year, driven largely by Pokémon. And Circona reported that Pokémon was the number one toy property in the US last year, generating $2.5 billion in retail sales. So Pokémon is fully making a comeback. And I still think about how my mom donated all my Pokémon cards when I was younger, because, you know, at this point, I'm sure those cards probably could have paid for my kids' college. Let's talk about some stocks making moves today. Reddit shares are surging this morning after the company got one of the biggest honors in the stock market, getting added to the S&P 500. Reddit will officially join the index on August 18th, replacing Avalon Bay Communities, which is a company that I had never heard of, but apparently they are a REIT that invests in apartments. So they're getting kicked out and Reddit is being added in. And this is a big deal for Reddit stock because there are trillions of dollars invested in funds that simply track the S&P 500. So when a company gets added to the index, those funds are forced to buy shares of that company. So Reddit will get a huge wave of automatic demand from investors who might not even know what Reddit actually does. Reddit stock is up more than 10% this morning in pre-market trading. Here's a mini fun fact. Reddit is now the second pure play social media company ever to be added to the S&P 500, the other one being Meta. You know, I gotta say, Reddit has been on a solid run since going public back in March of 2024. I remember people were clowning Reddit leading up to the IPO, but the stock has gone up five X and now the company is being added to the S&P 500. So shout out to everyone that invested in Reddit at the IPO. Now on the flip side, shares of applied materials are falling despite the company reporting a strong quarter. Applied materials makes the equipment used to manufacture semiconductors. So they are one of the pick and shovels companies behind the AI boom. As you can imagine, business is booming right now. Revenues jumped 25% year over year to $9.12 billion. And adjusted earnings came in at $3.50 a share. Both those metrics coming ahead of estimates. On top of that, the company also gave a stronger than expected guidance for the next quarter. So they pulled off the earnings trifecta. But despite that, the stock is still down 5% in pre-market trading. Now to be fair, the stock had already more than doubled this year. So the whisper number on Wall Street were sky high and clearly applied material didn't seem to meet them. You know, it is crazy how sometimes Wall Street isn't happy that a company beats earnings. They want the company to also beat the whisper number. But that tends to be the case whenever a stock has had a huge run-up like applied materials had this year. Let's wrap the show with a fun fact. The New York Knicks championship run this summer generated an extra $66.9 million for the company. This was the Knicks first NBA championship in 53 years and they clearly cashed in. The Knicks are owned by a company called Madison Square Garden Sports. That company also owns the New York Rangers and it's a publicly traded company. So they report earnings. And in their earnings call, the company said that basically every major revenue category improved during the playoff run, including tickets, luxury suites, sponsorships, food, drinks, and merchandise. I know that producer Mike was a big Knicks fan picked up some Knicks gear following the NBA finals. Overall for the full year, the company made $1.15 billion in revenue, which was up 11% from the previous year. So yeah, MSG Sports stock has been on an absolute tear. It's up 50% this year and it's doubled in value over the last 12 months. And what I find interesting about all of this is that even after this run-up in the stock price, the company's market cap is under $10 billion. Again, this company owns both the New York Knicks and the NHL hockey team, New York Rangers. So it kind of seems undervalued to me, especially since the Lakers just sold for $12.5 billion. I mean, I would think the Knicks would be worth at least that. So I don't know, maybe there's still some upside left in the stock. You know, something else that I noticed in these earnings is that sports teams might not be a great business. MSG Sports operating margins were just 2.5%. Then again, though, I don't think that rich guys buy sports teams for like the yearly cashflow. I think the reason these sports values keep going up is because it's a scarce asset and it's cool to own. It's like the ultimate rich guy prize at this point, owning a sports team. And there's some tax advantages as well, but we don't have enough time to get into all of that. By the way, I'm still shocked about the Lakers being sold. There are a lot of theories on the internet on what's going on behind the scenes with the current owner, Mark Walter, and how it could be a sign of a bigger problem in the system. But then again, these are just rumors. We'll have to wait for more information to come out. Also, apologies to the Brewers fans for calling the Dodgers the best team in baseball. You guys called me out, rightfully so. Well, all right, guys, that's the rundown for today. That's the rundown for this week. Hope you guys enjoyed today's episode. Thank you guys so much for listening, watching, and commenting. Shout out to Mike and V for all the work behind the scenes. And we'll see you guys back here tomorrow for the deep dive.