Here’s the pitch from Luke Lango that’s getting the attention of a lot of Gumshoe readers:

“Venture Capital firms Sequoia Capital, Andreessen Horowitz, Peter Thiel, and more are all over ChatGPT –

“But here’s what they’re not telling you.

“As a Venture Capitalist, I can confirm this “ChatGPT loophole” is available to regular Americans.

“And by following this loophole now, you can claim your stake in ChatGPT today – before it goes public….

“Based on my research, I now believe an IPO announcement could happen at any moment.

“According to The Wall Street Journal, the company is in talks with other venture capital firms to raise more cash.”

And since this is an ad, and they need to get you interested quick and urge you to pull out your credit card (they’re selling Lango’s Innovation Investor, which is currently $49/yr), they have to try to push your buttons right away…

“OpenAI CEO Sam Altman has the whole world watching…

“ChatGPT’s IPO

***WARNING: You have ONE chance to act, never again***

“Last call to claim your stake now with this ChatGPT loophole – before it goes public.”

Makes you feel like you’re at a car dealership, hoping to get a deal on a minivan from the guy with the slicked-back hair who keeps going back to “talk to his manager,” no?

Still, OpenAI and it’s ChatGPT chatbot programs and large language model AI system have gotten the attention of the world, with their launch back in November causing the stampede into any stock that could say it has an “AI” business. Heck, some companies even took that opportunity to add “AI” to their name, just to try to catch some of the overflow from the flood of manic investment into the sector. Even after an awful year in the markets in 2022, even though we know that the hottest craze is bound to crest and crash at some point, nobody wants to “miss out.”

So the idea that Luke Lango is peddling is that he can share the “ChatGPT Loophole” that lets you invest in OpenAI before it goes public, therefore positioning you for massive venture capital riches. What is it that he’s really talking about?

More from the ad:

“But you don’t have to be an insider or an accredited investor to position yourself now…

“Because thanks to my years working at the highest levels of venture capital…

“I found a loophole that lets you claim your stake in ChatGPT now before the IPO…

“Putting you on the winning side of the biggest wealth transfer in history.

“All it takes is just as little as a few hundred dollars.

“You’ll have to decide if that’s worth it to you.

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“But all my research points to this being a generational shift.”

And he says that he thinks OpenAI is going to generate “100X returns” for early investors… so he’s sort of implying that by investing in this “loophole” today, YOU can get those kinds of 100X returns, too. More from Lango:

“These are OpenAI’s own words, and I quote…

‘if we are successful, we expect to generate orders of magnitude more value than we’d owe to people who invest in or work at OpenAI.’

“Let me repeat that because, remember, we’re talking about a 100X max promise.

‘We expect to generate orders of magnitude more value than we’d owe.’

“In other words, Sam Altman is telling investors, ‘We expect to be worth trillions of dollars.'”

Dude, I know you think you’re a “venture capitalist,” but c’mon — there aren’t many well-funded tech startups who don’t expect to generate 100X returns. Lots of them fail, but you have to go in with optimism and high expectations, otherwise you’ll never raise any money.

And the context of that quote, actually, is that the returns for those venture investors and insiders are capped at that 100X level, because OpenAI’s nonprofit owns anything beyond those capped returns. We don’t know if the 100X returns cap applies to Microsoft’s latest investment, in January, but the expectation of OpenAI as of last year was that in subsequent funding rounds the cap would be lower, cutting off the “windfall” returns of VC investors at some point, to make sure their mission was funded on the nonprofit side. If the cap was still at that same point for Microsoft’s $10 billion investment in January, that would mean Microsoft’s maximum return would be $1 trillion, and that OpenAI, assuming no more shares are ever created, would at that point have a $2.9 trillion valuation (roughly where Apple is right now, the largest company in the world).

Lango also provides some other examples of past venture capital wins…

“Imagine going back in time with this wealth blueprint and being able to bet on Sequoia’s picks… pre-IPO.

“Like YouTube… before it revolutionized online video sharing…

“YouTube’s valuation has skyrocketed 82,600% since then…

“Enough to turn $5,000 into $4.1 million.”

Well, yes, YouTube turned out to be a great investment, partly because Google bought it for $1.65 billion when it was still very small and poured hundreds of millions of dollars into building that platform before it became monetized and, eventually, extremely profitable. The company was only two years old when Google bought it, and was one of the very few video platforms on the internet, so it grew phenomenally fast in those first couple years — and it was a revelation, they were hosting 25 million videos by the time they were three months old, and people could scarcely contemplate anything so crazy in 2006 (they host at least tens of billions of videos now).

Did that turn $5,000 into $4.1 million for any venture backers that YouTube had from 2004 to 2006? Quite possibly. In 2004, YouTube was just three dudes with an idea, so they probably took whatever offer Roelof Botha at Sequoia was offering, and that offer must have valued their idea at a tiny fraction of the $1.65 billion Google paid to acquire the company just two years later, in 2006 — I don’t know the numbers, but I know that the YouTube funding created such a windfall for Sequoia that it more than repaid all the investor cash and generated a profit for that particular diversified venture capital fund (which was Sequoia’s 11th fund).

And, we should remind ourselves, Google was MOCKED for spending that much money on a dumb video sharing site that would never make money, it was widely seen as a goofy acquisition by a company newly rich with its own IPO cash (Google had gone public just a couple years before, in 2004), particularly because investors still had a bad taste in their mouths after they’d been talked into swallowing so many stupid dot-com ideas in 1999 and 2000… and that’s pretty common, investors often mock venture-type investments because they’re not yet profitable, and they often compare the next big thing to the last big thing, but it certainly worked out well in that instance (YouTube had sales of almost $30 billion last year, mostly from advertising, so it generated more than 10% of the top-line revenue at Alphabet… if you want to then argue that YouTube is 10% of the value of Alphabet, which is rational if not necessarily true, partly because Google also put a lot of capital into building the infrastructure for YouTube in the interim, then that means Google’s $1.65 billion acquisition is now valued at about $160 billion, 1/10 of Alphabet’s $1.6 trillion market cap and a nice near-100X return over 17 years).

Just one more tidbit for you: Google has been profitable since before its IPO, thanks to search advertising, but they also showed some discipline with that acquisition — the $1.65 billion purchase price for YouTube in 2006 was just about equal to the profit Google had earned over the previous year. Compounding your earnings by reinvesting them in the business, either by buying a new company to expand or by investing in organic growth, is exactly what we want our companies to do. It doesn’t always work out as spectacularly as it has for Alphabet over the past 19 years, but it’s a worthy goal. Google’s net income in 2005 was roughly $1.5 billion… and their net income in 2022 was just shy of $60 billion…. and some of that has gone to compensation, since they were gradually growing their share base for their first dozen or so years as a public company through stock-based compensation, but, thanks to the cash-gushing power the company built during that time, it also bought back about 15% of the outstanding shares over the past few years, so today GOOG has only 12.7 billion shares outstanding, only a hair more than the 12.1 billion shares they had at the time they bought YouTube. Compounding sneaks up on you.

But anyway, that’s just one example of a venture funding windfall — sometimes they wins are even bigger than that, but we should recall, of course, that usually these investments lose money. The argument for venture capital investing is that the wins are so big that they can wash out the losses with ease — one 100X return, if you’re lucky enough to get that, more than makes up for dozens of 100% losses.

And more talk about how it’s still possible to get in on OpenAI as a venture investment…

“Following this ChatGPT loophole now gives you a rare chance to piggyback Sequoia’s next bet on OpenAI.

“But if you want to position yourself…

“You’ll have to act fast because The Wall Street Journal just reported OpenAI is in talks with venture capital firms to raise more cash.”

I don’t know whether OpenAI is going to raise more capital anytime soon — they might, I suppose, I didn’t see anything recently in the WSJ about more VC funding talks underway, but I imagine all the venture capital firms are dying to throw more money at this company. They’re certainly funding pretty much every AI-focused startup that anyone can dream up (which is why lots of AI folks are leaving Alphabet and other companies — there’s a land rush for the next rounds of funding in this space, so this is the chance to fund your own startup… a tempting lure for folks who are already wealthy but want to do something genuinely big).

And a reminder that Lango thinks this is like buying into the campfire business early, at the time when an early innovator among Homo Erectus at what we now call the Wonderwerk Cave in South Africa, discovered how to control fire to cook food.

“Google CEO Sundar Pinchai confirmed: ‘[Generative AI is] more profound than fire or electricity.’

“And Apple CEO Tim Cook admitted: ‘it’s going to affect every product we have.'”

Ummmm… OK. I don’t mean to be a Luddite (though I am sometimes), but that’s just insider tech speak from people who have no perspective. You really think that the automated creation of human-like writing and other creative work will be as important as providing light and heat to human beings for the first time? Maybe, but that’s a big ol’ hunk of hubris.

Still, yes, ChatGPT has been a surprisingly huge hit for its developer, and, even though it’s being chased by literally hundreds of competitors and doesn’t come with a clear monetization model yet (the processing power they need costs a lot more than they’re charging their users), I imagine OpenAI will get a much higher valuation in its next funding round, whenever that might be… and will presumably be a very hot IPO if the company ever goes public, assuming they don’t mess up the timing and fizzle out before then. And thanks to the current level of enthusiasm, they could probably go public today if they wanted to, at a massive valuation, though that’s also a big ol’ headache and distraction for a company that’s trying to build the future and doesn’t want investors asking about their margins and their capex and their ramp to profitability every quarter. Companies don’t have to go public to raise money anymore, not with Venture Capital firms and large partners like Microsoft awash in cash and eager to buy into hot ideas.

So Lango sees big riches ahead if you get in on this “loophole”:

“By the time OpenAI takes ChatGPT public, I wouldn’t be shocked to see their valuation blast 500% higher from here.

“That means the insiders are in perfect position to just keep getting richer….

“… the game is rigged.

“And right now, the only way you can get a stake in OpenAI is to wait until shares hit the open market.

“That means you’ll have to wait until IPO day once everyone with an internet connection and a brokerage account has already bid up the price…

“Of course, by then, the insiders will have made all the fast gains…

“And you’ll have missed out on this chance to follow this ChatGPT loophole.

“Because remember, an IPO is only going to happen once.

“And once OpenAI goes public, this opportunity to act pre-IPO vanishes forever…

“That’s why I’m going to show you how to take advantage of this ChatGPT loophole today.”

Lango goes further in pushing the OpenAI story, arguing even that they’re going to eat Google’s lunch…

“ChatGPT is going to launch the biggest wealth transfer in history, shifting $20.6 trillion away from Big Tech.

“In fact, I predict ChatGPT could drain up to 81% of one big tech company’s yearly revenue stream.”

That’s the Google reference — Alphabet gets roughly 80% of its revenue from advertising, and the biggest part of that is search advertising. Lango isn’t alone in predicting that ChatGPT’s “question answering” model, powered in part by Microsoft’s Bing search engine, will take share from Google’s search business, though Google is also offering “answers” in search queries more often, too, and is certainly trying to hold its own in that part of the market.

We’ll see — Microsoft and Apple are the only companies that are really big enough to take a bite out of Google Search, just because they own the distribution (since they own the two dominant operating systems, and can steer users to search wherever they want), everyone else is deeply rutted in the habit of using Google, and habits die hard unless the change is really revolutionary. To my eye, Bing search with ChatGPT is not dramatically better than Google, but we’ll see how that changes over time as both search engines evolve.

More from Lango…

“Because the world’s online search market will soon be worth $20.6 trillion in just a few years….

“ChatGPT could soon shift $20.6 trillion AWAY from Google and toward OpenAI and its investors…”

I’m not sure where he gets that “$20.6 trillion” number from, actually. If he thinks they’re going to shift $20.6 trillion of value away from Google in the next few years, then presumably Google’s search business is worth some meaningful fraction of that amount today (they own roughly 90% of the search market outside of China)… but Google’s revenue last year was “only” about $280 billion, and their market cap is “only” about $1.6 trillion, so I guess he assumes AI is going to somehow create a gigantic economic engine far beyond what people spend on search advertising today. Not sure who’s going to bear that cost, since a generative AI search using a chatbot like ChatGPT is also dramatically more resource-intensive than Google’s regular internet search engine right now, and the sum total of all global advertising spending today is estimated at something like $800 billion a year (about half of that is in the U.S.).

So I don’t know where he conjures up a $20 trillion number for this putative future valuation, but yes, Lango both says that OpenAI might be good for returns as high as 500% before the IPO, and, more lustily, that it might increase in value almost 1,000X by “shifting $20.6 trillion away from Google.” (I get 1,000X just by using the current start point, the implied valuation of OpenAI in January of $29 billion, at the time of Microsoft’s $10 billion valuation — $29 billion to $20.6 trillion would be a 710X return).

More daydreams of wealth from the ad…

“You don’t want to wait until the company goes public…

“And the whole world finally realizes what ChatGPT is about to dethrone Google.

“Because…

“Backing ChatGPT now could be like buying into Google in 1999….

“Sequoia Capital actually did do that – and they made 15,900% on Google’s IPO.”

That was the Series A funding round for Google, and yes, Sequoia was the lead investor in that round. That gave Google an implied valuation of $75 million at the time. Google’s market cap at the IPO five years later, in 2004, was about $16 billion — so yes, the return was probably about 15,900% ($75 million to $16 billion would be about 21,000%, but there was probably some dilution in those intervening five years, too).

That was an insanely fast launch for a company, by the way. Larry Page’s backrub web crawler, the academic project he was working on with Sergey Brin at Stanford, started trying to index the web in 1996, and what they then started to call Google search was being tested on Stanford’s network later that year, but was really only made publicly available, in a clunky-looking beta form, in 1998 (the Google.com URL was registered in late 1997). It took off like wildfire because it was SO MUCH better than Yahoo or Alta Vista or the other search engines, but even $75 million seemed like a wild valuation at the time… after all, it’s widely reported that Brin and Page offered to sell the company to Excite.com in early 1999 for one million dollars (which Excite rejected, only to see Google raise $25 million at a $75 million valuation a few months later). Interestingly, according to Crunchbase, Arnold Schwarzenegger, Shaquille O’Neal, Tiger Woods and Henry Kissinger also all participated in that Series A round for Google… I wonder if any of them still hold their shares today.

Got a little off topic there, but I love this kind of business history… back to the tease:

Will Luke Lango make you rich? Well, I don’t know — he makes very grandiose claims and recommends LOTS of small growth stocks, and sometimes those work out, so one would assume that he probably had a great record during 2020 and 2021, when all of those kinds of stocks went up, almost no matter what. He claims that title of “world’s #1 financial blogger” because of his stock-picking prowess, as recorded by TipRanks, though, as we’ve noted in the past, that’s a snapshot in time from some point in the past — as of today, he’s close to the bottom of the TipRanks rankings.

I don’t think TipRanks is necessarily a reasonable system for ranking folks when it comes to their investment ideas, but as long as Lango is using it in his ads we should provide the perspective of his current ranking — here’s what he shows in his latest ad:

And here’s what the TipRanks site says about him today:

Like I said, probably neither of those rankings matter — but they say that at one point 82% of his “ratings” were successful, and most recently 34% of his trades have made money. And there are a LOT of transactions apparently recorded by the TipRanks system — in that new ranking they say they cover one year, and Lango made 612 transactions. That’s a helluva lot of trading, and it also means that he can cherry pick those transactions to only talk about the best ones — and surely some of those 209 profitable transactions were very good. Good enough to make up for the losers? Well, if you were one of his subscribers, please do chime in on our Reviews page for Innovation Investor and let us know.

He also goes into his recent record, showing a handful of profitable trades from last year — picks he made between July 19 and August 9, 2022 that were huge successes, ranging from a 35% gain from Celsius Holdings (CELH) and Enphase (ENPH) to a 190% gain in On Semiconductor (ON). That’s an impressive little run of picks, but it also means he provided stock “alerts” for at least 10 different trades in the course of three weeks (assuming that he didn’t recommend any losing trades during those weeks that he’s not telling us about). Keep that up for a year, and most investors will quickly churn themselves into a money-losing tornado.

And, frankly, I have no idea how he’s generating or calculating those trade “wins” — On Semiconductor HAS been a great pick if you bought anywhere near the bottom, which was very close to the July 19 date when he says he “alerted” the stock… but the stock was around $58 on July 19, 2022, and today it is at an all-time high of almost exactly $100 — the maximum you could have possibly earned by buying the stock that day was about a 70% return. Maybe he’s picking shorter-term options trades or something, since several of his other big winners are similarly impossible from just a buy and sell of the stock during that period of time, but if that’s the case then you need to be clear about it… if only because speculative call-options trades have a much higher probability of resulting in a 100% loss. A 190% gain on an options trade is a lot different than a 190% gain on a stock trade, because the risk you took to get that gain is much higher (the stock could fall but probably won’t go to zero… but most call options do expire worthless). You’re also not going to recommend options trades to the massive subscriber base of a $49 entry-level newsletter, that would just lead to unhappy subscribers (almost no option contract can handle that level of order volume without the price going bonkers).

But anyway, what’s that “ChatGPT Loophole?” Is there some secret you don’t know about?

Sadly, no. Luke Lango’s “loophole” is almost certainly exactly what you think it is: Buy Microsoft (MSFT).

There are a dozen or so venture capital firms who have funded OpenAI over the past eight years, let by Y Combinator, Khosla Ventures, Peter Thiel, Tiger Global, Andreessen Horowitz, Sequoia Capital and a few others… but the only publicly traded company or publicly available fund that has made a meaningful investment in OpenAI is Microsoft, which bought in with a billion-dollar investment a few years ago and then dramatically “doubled down” by buying close to a third of the company in January of this year, for $10 billion (that’s the deal which got everyone’s attention and ignited the AI mania again, and it’s also where we get the implied valuation of $29 billion for OpenAI). There is no secondary market for OpenAI shares right now, largely because it’s a hot idea and it’s still quite young, so it doesn’t look like there are any insider shares leaking out as employees leave or try to cash in (such shares sometimes show up on marketplaces like Forge Global and EquityZen, but I don’t think that’s been the case for OpenAI shares yet), and none of the “public VC funds” like Private Shares Fund (PRIVX) or Suro Capital (SSSS) own OpenAI shares. The funding has all come from a pretty tight group of early sponsors at this point, and $11 billion of the cash they’ve raised so far has come from Microsoft.

$11 billion and $29 billion are big numbers, so it sounds like a big deal, and it is. Microsoft is clearly hoping to take a bite out of Google search with this partnership, among other goals, and they had little to lose in the search business because of the irrelevance of their Bing search engine, so they aggressively went in to partner with ChatGPT on providing chat-based answers to queries rather than “search results”, and the world went bonkers. That was the moment when Alphabet lost $100 billion of market cap in the space of a couple days, when we were all gaga over how cool ChatGPT search looked (they’ve since recovered quite nicely, at least for now).

We should insert some context here, however: If Microsoft earns a 100X return on its OpenAI investment, which seems extremely unlikely over the next decade but might be possible, then that would mean they’re turning about $11 billion into $1.1 trillion. That would indeed be a big deal, of course, you don’t see a 10,000% return every day, but we should note that Microsoft right now carries a valuation of about $2.5 trillion. If we ignore their $11 billion OpenAI investment, and Microsoft keeps up their anticipated growth rate (about 12% revenue growth per year) for a decade, then in ten years MSFT might report revenue of something like $650 billion. If they have profit margins that are similar to the current ones at that point, and still carry the lofty valuation they have today, about 24X EBITDA, then Microsoft could be a $7 trillion company at that point (lots of “ifs” in there, to be sure).

The daydreams about ChatGPT’s riches are exciting, but at this point they are probably more fuel for the story of Microsoft than they are for the foreseeable income at the company. Microsoft has made a lot of billion-dollar acquisitions over the years, though I don’t think they’ve ever invested anything close to $10 billion in a non-control investment, so their purchase of a large stake in OpenAI and their active partnership with OpenAI on building out their large language models and hopefully building a dominant platform for future AI projects is certainly notable… it’s just that we shouldn’t really expect a windfall from a future OpenAI IPO just because we own Microsoft shares. Microsoft has bought into a lot of tech companies over the past couple decades in an attempt to buy its way into new markets, and there have been plenty of expensive misses (aQuantive or Nokia, for example) to go along with the hits (like LinkedIn .

If Luke Lango is right with his more near-term projections, and OpenAI does indeed balloon in value by 500% before going public, that would mean that Microsoft’s stake in OpenAI would go from being worth about $11 billion today, to something like $65 billion. Yes, that’s real money — but it also pretty quickly gets absorbed by a $2.5 trillion behemoth… regular mild volatility in the share price on any given day can easily change the value of Microsoft by $100 billion (that’s about a 4% move for the stock — more than it moves on most days, I suppose, but not a shocking lurch for the company’s valuation).

OpenAI is a great story, and it’s easy to see them ballooning to a massive valuation on the strength of the rapid adoption of ChatGPT by lots of partners, and the buildout of a big “app store” environment of other people using ChatGPT’s processing power. That could lead to a huge IPO at some point, if they decide to take that path, or it could lead to Microsoft buying a controlling stake in the company, if they can get that past regulators. If that happens in the next few years, and we’re not just talking about the company maybe popping 500% from here as it heads into an IPO soon, as Lango teases, what value might that bring to Microsoft?

Well, we can just spitball about that a little. What might we guess that OpenAI would be worth if it went public in a big, splashy IPO, during a bull market? It’s losing tons of money, it’s extremely expensive to buy all that processing power, but the revenue is certainly growing — the best estimates I’ve seen are that OpenAI will have revenue of $300-400 million in 2023, growing to $1 billion next year, in 2024.

That would be fantastic, something like 300% growth and a billion dollars in revenue, that would get a lot of attention in an IPO. Last year they lost about $540 million, with almost no incoming revenue, and we don’t know what the expense situation looks like this year — but I would imagine that, as they continue their hiring frenzy and keep buying more NVIDIA chips to deal with the dramatic increase in demand, their expenses will also grow considerably. I’ll throw a wild guess out that they’ll have $1 billion in revenue in 2024, and $2 billion in operating expenses. That’s a ton of cash burn, of course, but they can afford it thanks to the big bolus of cash from Microsoft this year… and if that revenue growth continues, or even accelerates, investors will probably lust after a piece of any IPO deal, regardless of how much cash they’re burning.

What valuation would they put on the company? I’ll be super-aggressive and guess that investors might be willing to pay 50-100X sales to get a piece of this huge growth story. Let’s use the top end of that — 100X sales, assuming the projections are right, would mean a valuation for OpenAI of $100 billion next year. Maybe the projections of revenue growth are too pessimistic, though, maybe ChatGPT will continue to boom and become a widely-used tool by businesses and consumers, beyond the “playing around with it” level that it’s at for so many people right now, and they’ll hit $2 billion in revenue. Maybe they’ll go public in a year or two as a $200 billion company, by far the largest valuation for a US tech startup IPO ever (I think Uber is the current recordholder on that front, they came public at a $75 billion valuation, though depending on how you measure some other recent IPOs, like Airbnb, were pretty close).

That would be awfully exciting. It would probably mean that they’ll also be diluting those venture capital investors, including Microsoft, by selling new shares of stock in that IPO, but let’s go one step further on our voyage of optimism and say no, they won’t have to do any further dilution at the IPO or before, they won’t burn as much as as we’re expecting, and they won’t have to create more shares to fund the next leg of growth. That would mean Microsoft still owns about a third of the company, and at that point, with a $200 billion valuation, Microsoft’s investment would be worth about $70 billion. A 7X return on their investment, which is pretty awesome.

Still, though, it wouldn’t necessarilyhave a lightning-strike impact on MSFT shares. That’s a $60-70 billion one-time windfall for the company, and that’s obviously big… but Microsoft earns roughly that much in profit each year, and is currently sitting on about $100 billion in surplus cash. Will it add $100 billion or $200 billion to Microsoft’s market capitalization? More? I don’t know, maybe, but investors have already increased their assessment of Microsoft’s value by about $750 billion this year, with the stock up about 40%, and probably some of that is due to the enthusiasm over AI and ChatGPT.

We can’t know the future, but we can know that Microsoft is one of the best companies in the world, with the most predictable and recurring earnings stream as they control so much of corporate computing and are becoming stronger in other areas (cloud, now AI, maybe search, perhaps gaming if their Activision Blizzard acquisition goes through)… and we can also say that Microsoft is already valued as of it’s one of the best companies in the world.

They’ve grown their earnings by about 22% per year over the past five years, and analysts see that slowing down to about 12% per year in the next five years, and the company is currently valued at about 36X the profits they’re expected to make this year. Those estimates for the current year could be low, since analysts are predicting a flat year for MSFT and it might well be that the surprising resilience of the economy so far means they’ll “surprise” a bit… but this is a massive, massive company, and it’s followed very closely by hundreds of analysts, who usually get their guesses pretty close to the mark. The surprises are not usually very dramatic when Microsoft releases its earnings updates (unlike NVDA, which often shocks analysts, in both directions, and seems to delight in defying their forecasting abilities).

Where does that leave us? For me, I’d say Microsoft is a solid investment, with a fair chunk of optimism priced in to the valuation. They trade at a PEG ratio of about 3.0, which could still work out reasonably well because of their uniquely profitable business and their extremely entrenched position in corporate computing, but that’s still a tough valuation to justify, at last for me (PEG is price divided by earnings divided by the expected growth rate, a metric popularized by Peter Lynch to expand on the PE ration and incorporate the growth rate when comparing company valuations — I often put a company with a PEG ratio between 1.0-2.0 in the “growth at a reasonable price” category, but going over 2 for a mature growth company is a hard sell for me… which means I’d be a lot more comfortable with Microsoft down below $250).

That doesn’t mean the valuation is terrifying — Microsoft’s valuation is nowhere near as extreme as NVIDIA (NVDA), which is perhaps the most “pure play” stock in the AI world but trades at a valuation which makes future returns extremely hypothetical (more on that in my last NVIDIA article here) — but it’s still pretty extreme.

Microsoft is not alone in trading at an optimistic valuation, of course — Apple (AAPL), the only company that’s larger than Microsoft (Apple’s market cap is about $3 trillion today, the first company to reach that level), is expected to grow even more slowly than Microsoft. Analysts predict 8% annual earnings growth for the iPhone maker, and Apple trades at almost as high a valuation, roughly 32X expected 2023 earnings, so Apple today has a PEG ratio of about 4.0 if we’re using the same bank of estimates as I did for Microsoft above (in both cases, I’m using the current-year PE ratio and the forecasted five-year earnings growth rate). The whole market is on the expensive side these days, and that’s certainly reflected in most of the mega-cap stocks who dominate the market. And I would be more likely to buy MSFT than AAPL, if you forced me to choose today (I don’t currently own either).

So… can you buy Microsoft to get some exposure to OpenAI? Yes, and it’s pretty much the only way to get direct exposure.

Should you? Well, that’s your call. I’m not going to, but it’s not a terrible idea. You’ll own one of the best and probably sturdiest large growth companies in the world, even if, as I expect, OpenAI doesn’t end up having much of a financial impact on Microsoft over the next five years. Maybe the stock will pop higher still because of this ChatGPT enthusiasm, but I’d be a little cautious — probably some of Microsoft’s $750 billion increase in valuation so far this year has been spurred by their involvement with OpenAI, and that’s a lot of weight to put on an $11 billion investment (though to be fair, Apple and Alphabet have also gone up about 40% so far this year, the rising tide has lifted lots of boats, so maybe I’m overstating the impact of ChatGPT on investor perceptions).

Put another way, if you invest $342 into buying one Microsoft share today… about $1.48 of that investment reflects what Microsoft has so far invested in OpenAI.

So, are you fretting about whether you should buy one of these big high-tech leaders like Microsoft or Apple? Well, I wouldn’t try that hard to talk you out of either one — they’re both great companies, even if I think they’re both pretty substantially overvalued at the moment, given how challenging it is to post “surprise” growth when you’re at this massive size and have this kind of dominant market share.

But you also don’t really have to fret — you can probably use that mental energy elsewhere. These are not venture capital investments, you’re not going to “miss out” on a revolutionary change because you opt out of buying a piece of one of the biggest companies in the world. Heck, if you own an S&P 500 index fund, you’re already putting about 14% of your money into Microsoft and Apple (combined).

In fact, almost nobody of note, with the possible exception of Warren Buffett, is “overweight” Apple or Microsoft, it’s just too hard for institutional investors or fund managers to justify putting more than 5-10% of their money into a mega-cap stock that is extremely well-known and already dominate the markets… so if you just buy an index fund, and therefore effectively put 6.5% of your capital into MSFT shares, you’re probably investing more in Microsoft than at least 90% of the “smart money” investors. Maybe that’s enough to cure any FOMO panic?

So yes, I’m watching the ChatGPT story (it might put Stock Gumshoe out of business someday, after all), and I’m curious to see how it evolves, and how OpenAI changes as it gets more public scrutiny and perhaps thinks about going public in the future… but I’m not buying Microsoft as a way to clutch at this little “loophole” and get a tiny slice of direct ownership exposure to OpenAI and ChatGPT. I won’t make fun of you if you do, it’s quite possible that buying Microsoft here will lead to a profitable investment… but I would urge you not to go out and start pricing Lamborghinis just yet.

Disclosure: Of the companies mentioned above I own shares of Alphabet, NVIIDA and Warren Buffett’s Berkshire Hathaway, and have invested a small amount in the Private Shares Fund. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.