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Key Points<\/p>\n
OpenAI is aiming for a $1 trillion IPO valuation, but AI\u2019s increasingly poor economics and its own terrible financials mean that the OpenAI IPO delay may turn into no IPO at all.
\n OpenAI is now severely marking down the price of its high-end AI models created just weeks before, suggesting it\u2019s having significant trouble competing.
\n With a price war, OpenAI is likely to be burning more cash at an even faster clip than before, meaning it will need to raise cash sooner than some may have thought.<\/p>\n
OpenAI CEO Sam Altman is aiming for a $1 trillion valuation for the initial public offering (\u201cIPO\u201d) of the artificial-intelligence (\u201cAI\u201d) model company. But the increasingly poor economics of AI and the company\u2019s terrible financials mean that even an already delayed IPO may never arrive.<\/p>\n
OpenAI is facing white-hot competition, with the company now severely marking down the price of high-end AI models created just weeks before. Altman and his public relations team tried to balance that news with the fact that OpenAI\u2019s customers now comprise more than 1 billion users and more than two million businesses. Instead, investors need to pay attention to OpenAI\u2019s lack of pricing power.<\/p>\n
In late July, Altman announced the following price cuts on two recently adopted models and an upgrade on a third model.<\/p>\n
AI modelFeaturePrice cutGPT\u20115.6 LunaFastest and most affordable model-80%GPT\u20115.6 TerraBalanced model for everyday work-20%GPT\u20115.6 SolNow offers Fast modeNone<\/p>\n
As part of the announcement, OpenAI explained that GPT-5.6 had become more efficient to run, so the company said: \u201cWe\u2019re passing those gains on to customers with lower prices\u2026\u201d<\/p>\n
It\u2019s a sales pitch that feels a lot like a seedy car salesman trying to \u201cget you in a new car today.\u201d But businesses aren\u2019t usually trying to lower prices \u2013 their profit driver \u2013 unless they need to. And that\u2019s even more true for a company\u2019s latest and greatest models, as is the case at OpenAI.<\/p>\n
That\u2019s the tough situation OpenAI finds itself in today, as Chinese AI rivals such as Kimi K3 and DeepSeek models make heavy incursions into OpenAI\u2019s user base. They\u2019re releasing high-power AI models that do most of what OpenAI\u2019s (and Anthropic\u2019s) models do, but they charge a fraction of the price, sometimes just a few percentage points of what higher-end models charge.<\/p>\n
It\u2019s a price war that OpenAI simply can\u2019t afford, one way or the other. OpenAI is already burning cash furiously and must be propped up by its customers. At the same time, it needs revenue to make good on an estimated $1.4 trillion in spending commitments in the coming years.<\/p>\n
Either way, the company may well go broke. Many firms that are counting on it for revenue \u2013 Oracle (ORCL), Cerebras Systems (CBRS), and CoreWeave (CRWV)<\/a> \u2013 may be badly hurt.<\/p>\n So, OpenAI must raise money to continue operating, but investors need to see a credible path to profitability before Altman\u2019s IPO goal of $1 trillion can ever come to fruition. This impasse means that OpenAI has tentatively delayed its IPO until 2027, but it may be \u201cdelayed\u201d permanently.<\/p>\n OpenAI\u2019s Cash Burn Is Probably Getting Worse<\/p>\n The unprecedented scale of OpenAI\u2019s ability to lose money is something to behold. OpenAI reported an operating loss of $20.9 billion in 2025 and estimates for the first quarter of 2026 peg its operating loss at a further $7 billion. At this rate, OpenAI could easily lose $30 billion in 2026 and possibly even $35 billion to $37 billion. We\u2019ll have to wait for leaked financials for a better idea.<\/p>\n But a price war won\u2019t likely improve profitability, even if it does increase sales for the moment.<\/p>\n In fact, we\u2019re seeing OpenAI\u2019s sales continue to soar, though the company\u2019s executives provided only very high-level financials. CFO Sarah Friar told employees that OpenAI\u2019s July annualized recurring revenue had exceeded the company\u2019s total for the second quarter, according to CNBC.<\/p>\n While that feat may actually be less impressive than it sounds at first, it does indicate a ramp in sales at the end of the quarter. But it may well be one that the company can\u2019t afford.<\/p>\n The interesting detail here is what leaders attributed the growth to: the company\u2019s enterprise agent ChatGPT Work, its AI coding tool Codex, and its GPT-5.6 series of models.<\/p>\n That is, the same GPT model that OpenAI put on sale at a severe discount at the end of July.<\/p>\n For normal companies, sales growth translates into scaling profitability. In OpenAI\u2019s case, higher sales translate into even greater losses, and we have plenty of signs that OpenAI is burning more cash than ever, as it\u2019s forced to lower prices to keep getting business.<\/p>\n So, higher sales are not good news when you\u2019re losing more money in absolute terms.<\/p>\n The inability to price AI models so that they\u2019re profitable shows that AI models are mostly fungible. Businesses are shifting to the lowest-cost model to carry out their work, and some are reserving the high-cost models for their best and highest uses. But Chinese AI models have been showing that they, too, can move upmarket<\/a>, leaving less room for OpenAI here, too.<\/p>\n For example, among AI startups using open-source software, about 80% are using Chinese AI models, according to Andreessen Horowitz.<\/p>\n While OpenAI struggles to get itself in shape for an IPO, China\u2019s DeepSeek is planning its own public offering by the end of 2026 or early next year<\/a>.<\/p>\n OpenAI\u2019s Next Funding Round<\/p>\n All this means that OpenAI is likely to be burning even more cash at an even faster clip than before. The upshot then is that it will need to raise another funding round sooner than some may have thought. OpenAI last raised $122 billion in March, valuing the company at $852 billion.<\/p>\n OpenAI is under significant constraints, however. Venture-stage companies do not like to raise money at a lower valuation than the prior funding round. It indicates that something\u2019s not right and dings the company\u2019s reputation. That reputational worry is even greater in the field of AI, which is being hyped as much as any technology ever has been. If OpenAI can\u2019t raise its valuation in the next funding round, it will look like there\u2019s something wrong. (And there is\u2026)<\/p>\n OpenAI needs to raise money at ever-higher valuations to keep the market\u2019s confidence up and so that it can retain the potential to raise even more money in the future.<\/p>\n Of course, Altman wants to line up funding before he needs it, too. Increasingly larger losses in future quarters will hurt investors\u2019 confidence to put up more cash. At the same time, ready cash that can subsidize its ongoing losses means OpenAI is not immediately subject to the market\u2019s whims, giving Altman some maneuvering room if funding conditions tighten for a while.<\/p>\n Like the last funding round in March, OpenAI\u2019s next round is likely to be funded by mega-cap companies that need the AI party to continue. Last time out, Amazon (AMZN), Nvidia (NVDA), and SoftBank (SFTBY) put up $110 billion of the $122 billion raised by OpenAI<\/a>. Investors may need to raise cash from the debt markets themselves to plow into the money-losing OpenAI.<\/p>\n OpenAI is a linchpin in the AI economy, since it\u2019s promised to spend literally more than $1 trillion across some of the biggest AI-related firms. If it\u2019s unable to meet these commitments \u2013 and it must raise the cash to do so \u2013 the dominoes will begin to fall across the entire AI sector.<\/p>\n Confidence is key in these situations, and investors are already feeling skittish after a poor debut from SpaceX (SPCX)<\/a> and massive declines in memory stocks such as Micron Technology (MU)<\/a>. The inability of OpenAI to raise at a higher valuation could be a sign that the Teflon stock market for AI stocks may be about to turn. So, keep a close eye on OpenAI\u2019s ability to raise funding.<\/p>\n Regards,<\/p>\n James Royal, PhD<\/p>\n