Now That’s What I Call A Capital Call

OpenAI’s Sam Altman is raising investment funds

Author

Ate A Pi
February 12, 2024

🔷 Subscribe to get breakdowns of the most important developments in AI in your inbox every morning.

The Wall Street Journal drops a bombshell, OpenAI’s Sam Altman is raising investment funds in the amount of:

7 trillion dollars

The article is sparse and built on hearsay, but OpenAI is:

  • Raising 5-7 trillion dollars in a

  • partnership between investors, chip makers, power providers

  • to build chip foundries to be run by existing chip makers

  • mostly debt-funded

  • In talks with UAE government / Abu Dhabi ruling family

  • Also met with Masayoshi Son at Softbank and TSMC

  • In talks with TSMC, wants to build dozens of chip fabrication plants in the next few years

  • Middle East investor money, TSMC to build and operate, OpenAI to purchase chips

  • Microsoft is aware and supportive

  • Sam wants to build fabs in USA, but constrained by skilled labor supply, has been in talks with US Department of Commerce about these plans

Firstly, is it true? Yes absolutely! In fact, the WSJ would have asked Altman for comment hours before it was published, which was probably why Sam tweeted the following:

Next the foreign backdrop:

  • Abu Dhabi is the wealthiest of the United Arab Emirates

  • 1.5 million population

  • Abu Dhabi bailed out Dubai, the more famous of the Emirates after the 2008 crisis, and just to make sure everyone knew who was the boss in town, had Dubai name its crown jewel tallest skyscraper in the world Burj-al-Khalifa, after the ruler of Abu Dhabi Khalifa Bin Zayed,

  • Anyway, gulf states started preparing for the end of oil a long time ago

  • Recycling their petrodollar holdings into US assets

  • Abu Dhabi has a large sovereign wealth fund

  • That bought AMD’s chip fabrication operations after the 2008 crisis and listed them on the Nasdaq in 2021 as GlobalFoundries

So this is not the Sheikh’s first chip tango. Then the backdrop on the Nvidia side is the insane profits they are making:

That has made the profits soar, and the stock price zoom upwards, 17x in 5 years:

Nvidia has a Return on Invested Capital of 128%, while ARM, a similar business which Nvidia tried to buy, has an ROIC of 12%. ARM is listed, and controlled by the Softbank Vision Fund… in which the largest external investors were.. drum roll please…. the Mubadala sovereign wealth fund of Abu Dhabi.

So now, we see the outlines of the Grand Bargain:

  • OpenAI and Microsoft provide purchase guarantees for chips

  • Designed by ARM (owned by Masa/Softbank/Abu Dhabi)

  • Fabricated by TSMC / Global Foundries (owned by Abu Dhabi)

  • Using the existing tech stack from ASML and other suppliers

  • Using capital from the Gulf States and Asia

  • Location of buildout primarily in the US, IF skilled labor imports can be agreed upon (the discussions with Gina Raimondo’s team at Commerce, noting that Raimondo was a PE executive who no doubt would have fundraised from the Middle East at some point)

The idea seems to be to allow TSMC to build and operate “dozens” of leading edge node plants in one go rather than the current system of building 1-2.

Audacious!

The responses to this were mostly just “Get Outta Here”

But some were starting to think about this a little:

Personally, all investment managers are sheep, and long-term bets can be seen a mile away….and with a big enough stash, you can outlast industry cycles until you are right. The below from PIMCO:

A sea change is occurring in the semiconductor industry. Once notorious for boom and bust cycles that revolved around demand for a few consumer devices, the chip industry now powers most aspects of our economy. This proliferation, in our view, will smooth steep cycles and drive durable demand, even as the economy slows and recession risk increases. Yet chip stocks still trade at a discount based on the cyclicality of the 1990s and 2000s. We think this presents an attractive opportunity for investors ahead of what we believe will be a market revaluation to higher multiples as earnings prove more stable than in previous cycles.

PIMCO - 10/06/2022

Sam Altman is trying to move Nvidia and the industry out of its consumer roots, with high-risk aversion and preference for a hefty margin of safety and profit with small volumes, to an industrial vision of large volume, low profit, utility-scale manufacturing more reminiscent of how Apple is able to get leading-edge tech at large volume and reasonable prices. Apple does not pay 99% margins on M1/M2/M3 chips, even though they were each built on leading-edge nodes.

Investors like sovereign wealth funds (who read the PIMCO thought leadership) are ready to be persuaded. The Biden administration is probably willing to make a skilled immigration deal post the 2024 election. So the cards are starting to line up for a Grand Bargain.

Of course.. it could also be the typical tale of global dollar recycling, with Sam Altman in the protagonist role of the all-time single best explanation of:

7 trillion dollars sounds like a lot.. but automotive industry revenues were $2.86 trillion in 2022 alone…and intelligence sounds more impactful than transportation? If the intelligence sector becomes as big as the auto sector:

  • $2.8 trillion in revenues per year

  • $28 trillion for 10 years assuming no growth

  • $210 billion EBITDA (7.5% margin)

  • $7 trillion total invested capital (3% ROIC applied to $210 billion EBITDA)

I’m as surprised as you are.

Become a subscriber for daily breakdowns of what’s happening in the AI world:

Reply

or to participate.