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"Because Goldman does this kind of nonsense." Hilarious. You can agree or disagree with Zitron but he really has no business talking about Goldman Sachs. His p

"Because Goldman does this kind of nonsense." Hilarious. You can agree or disagree with Zitron but he really has no business talking about Goldman Sachs. His posts are littered with evidence he has no ability to perform the type of financial analysis he thinks he does.

dgellow 2mo ago
Mind sharing more details?
- ElProlactin 2mo ago
  Sure. Here's an example: https://www.wheresyoured.at/exclusive-openai-financials/ https://www.wheresyoured.at/exclusive-openai-financials/ Zitron wrote: > Additional factors – including interest income and interest expense – left it with a net loss of $8.84 billion. It then marked $3.74 billion of losses as “net loss attributable to noncontrolling members capital,” leaving the net loss attributable to the company as $5.09 billion. > It’s unclear what this means, nor how OpenAI reconciled the removal of $3.74 billion in costs. I will not speculate further. It is very clear what this means, and no speculation is required if you understand basic consolidation accounting, which you would expect someone in his position to understand. It's not rocket science: when you have a parent company with entities it doesn't wholly own, the slice of losses belonging to the other equity holders is split out as "noncontrolling interests." Nothing is removed or hidden; the total loss is unchanged, it's just allocated to reflect that the parent company doesn't own the whole. Framing it as OpenAI removing costs implied something sketchy and requiring speculation where there's only routine GAAP accounting. But it's even worse than this. So many of Ed's claims conflate the foundational R&D and capital expenditures these companies are incurring with the unit economics of their businesses. He seems woefully unable to understand that you could sped gobs of money on the former and still have positive gross margins that scale over time with the latter.
  - Driver4732 2mo ago
    But how does that detract from the overall point that Open AI is losing billions of dollars? If there's an insatiable demand for AI compute, where's the profit?
    - ElProlactin 2mo ago
      First and foremost, it's about competent reporting. You can think a company is doomed and still expect people to report on it accurately. Zitron continually presents things in ways that create a hyperbolic narrative. Turning routine consolidation accounting into an unexplained mystery hinting at some sort of fraud is the perfect example of that. He does it so often and in such a way that I truly believe he just doesn't understand accounting. It doesn't take a rocket scientist to understand that OpenAI is losing money. But the question ("where's the profit?") assumes that profit is the thing being optimized for. It isn't. There are basically three buckets here: cost of serving a query, cost of training and capex for capacity. The first one is unit economics. The other two are bets on the future that get expensed against present revenue. A company can serve every query at a healthy gross margin (OpenAI has improved margins considerably) and still have a $9 billion loss because it spent $12 billion training a model that generates $0 this year. Zitron constantly blends everything into a pithy "they lose money on everything" narrative, which just isn't accurate. The thing is that OpenAI could have a very different P&L if it chose to, say, stop training the next model. The problem, obviously, is that if you stop training the next model, the competition might eat you. So right now you have a situation where the the frontier model you spent $12 billion on depreciates in about 18 months, the GPUs depreciate on a schedule nobody agrees on, and you seemingly can't stop the cycle without risking your position in the market. This is the legitimate bear case, but the problem with Zitron is that he doesn't make it using an argument that is coherent and honest as far as the accounting is concerned. And the accounting is everything.
    - nr378 2mo ago
      High growth companies often have significant negative cashflow during the early high growth era, followed by positive cashflow in the years later down the line. This phenomenon is known as the J-curve[1], and Uber is a good example of how this can turn out absolutely fine. To some extent, the entire Venture Capital industry exists to finance precisely this dynamic! Nb. I'm not suggesting OpenAI is fairly valued, or that they will definitely become profitable, but "OpenAI is losing billions of dollars" doesn't really mean anything in and of itself. [1] https://www.uark.vc/blog/breaking-down-the-j-curve-the-journey-of-a-vc-investment https://www.uark.vc/blog/breaking-down-the-j-curve-the-journ... (many other similar such articles exist)
  - beepbooptheory 2mo ago
    Maybe I am little confused here but what you just described here doesn't sound great either? What smaller entities who OpenAI is parent to lost 3.74 billion dollars? Or maybe just can you point to some primary sources about this? I am not too bright about this stuff.. I guess I always thought it was usually about having more money than when you started? Or at least about having a story of how you will have more money? Is that not right?
    - ElProlactin 2mo ago
      You can look up ASC 810-10-45. OpenAI isn't a single company. I haven't followed all the details with its structure change/recapitalization, but it's (I believe) a parent sitting on top of an LLC that outside investors like Microsoft hold a large minority stake in. The rules say that the parent has to report 100% of the LLC's revenue and expenses as if it owned everything and then, at the end, back out the share of the loss that economically belongs to the minority holders. So $8.84 billion is the whole loss, $3.74 billion is approximately the outside members' proportional share of it, and $5.09 billion is what's left for the parent. Nothing disappeared or was hidden. It's one number presented two ways because two sets of people own it.
      - beepbooptheory 2mo ago
        OK interesting. Who specifically are these other subsidiaries that clearly account for this loss though? I get it's just a trueism for those in the know like you, but it's pretty fascinating for me at least! Like is there one example company we can point to here? Even if there were like 20 subsidiaries and the combined loss was 3 billion, that would feel noteworthy on its own? Like to be absolutely honest, this point ends up just sounding more alarmist than the claim you took issue with originally. But perhaps I am just misunderstanding.
        ElProlactin 2mo ago
        Microsoft owns a significant minority stake in the LLC to my understanding.
        2mo ago
  - grey-area 2mo ago
    Can you explain which partly owned subsidiaries lost $3.74 billion and why it is legitimate to exclude that from their losses in a non-handwavy fashion? Your condemnation leaves me none the wiser and this does matter. This can of course be used to distort the financial picture and this is a significant amount, almost 50% of losses. Is this from the ‘non-profit’ which used to be OpenAI or something else? Smells like creative accounting to me and the CEO was accused by his board of dishonesty.
    - ElProlactin 2mo ago
      I explained this is a different comment. This is basic consolidation accounting per ASC 810-10-45. https://dart.deloitte.com/USDART/home/codification/broad-transactions/asc810-10/roadmap-noncontrolling-interests/chapter-4-intercompany-matters-with-noncontrolling/4-3-transactions-between-parent-subsidiary https://dart.deloitte.com/USDART/home/codification/broad-tra... I get that not everyone is an accountant or has had to become educated in accounting matters as part of their work, but you really shouldn't say "smells like creative accounting to me" if you don't have a basic understanding of the subject. This is like the least interesting thing about OpenAI's financials, and Zitron framing it as some sort of mystery hinting at fraud is one of the least effective ways to make a point given that it's absolutely a nothingburger. No loss is disappearing or being hidden. This is by-the-book consolidation accounting.
      - grey-area 2mo ago
        You have avoided answering the question. The accounting mechanics are uninteresting, lots of normal accounting rules are abused for nefarious purposes (see Enron et al). What is interesting is why this was done. Which subsidiary owns the loss and why?
        ElProlactin 2mo ago
        Here's the logic since it's not that hard. Say Parent Co. controls Subsidiary LLC and owns 60% of it. Minority Corp. owns the other 40%. Subsidiary LLC loses $10 billion. Consolidation accounting requires Parent Co. to report the full $10 billion loss, as if it owned all of Subsidiary LLC, which it doesn't. Then, on the next line, it attributes the portion belonging to the other owner (Minority Corp.). There are two lines and one loss. Nothing is removed and nothing hidden. This is the definition of disclosure, not obfuscation. Note that the trigger for applying this is actually control, not ownership interest. My understanding is that OpenAI Foundation controls the public benefit corporation with 26%. And for an LLC, the loss split isn't automatically pro-rata by ownership. It follows the profit-sharing terms in the operating agreement, which is why the there's a Hypothetical Liquidation at Book Value method. Under an old capped-profit waterfall, nobody can verify the exact figure without looking at the operating agreement. "I can't verify the split" is a very different statement than "it's unclear what this means." Your "why" question: the reason it works this way is that consolidated statements are meant to show the business as an operating whole because that's what a controlling parent actually runs. You can't operate 60% of a data center or sign 60% of a compute contract. Every line (be it revenue, expenses, assets, etc.) comes in at 100% for that reason. The noncontrolling interest line then answers the separate question of how much of that whole belongs to the parent's own shareholders. One statement answers two questions (what does this enterprise look like versus how much of it is ours). As for your "who" question, the answer is simple: the other equity holders. Again, OpenAI doesn't own 100% of the entity. My understanding is that Microsoft is one of the other equity holders.
  - matthewdgreen 2mo ago
    [flagged]
- npilk 2mo ago
  One example - he often compares current revenues to capex being spent on future capacity to claim that AI companies aren't profitable. (See this post for example: https://www.wheresyoured.at/am-i-meant-to-be-impressed/ https://www.wheresyoured.at/am-i-meant-to-be-impressed/ .) But this ignores that the capex spent to build more capacity is expected to generate additional future revenue. You don't need to recoup your capex immediately. A better approach would be to amortize the capex and compare revenues to that. Clearly he assumes revenue won't increase enough to recoup this level of capex (and it's very possible it won't) but IMO it's either a miscalculation of how the financing works or a deliberately misleading framing to compare current small revenues to a big scary capex number. I'm sure the above is simplified by the way, but I am confident that people who work at Goldman understand the relevant details extremely well.

dgellow 2mo ago

Mind sharing more details?

ElProlactin 2mo ago
Sure. Here's an example: https://www.wheresyoured.at/exclusive-openai-financials/ https://www.wheresyoured.at/exclusive-openai-financials/ Zitron wrote: > Additional factors – including interest income and interest expense – left it with a net loss of $8.84 billion. It then marked $3.74 billion of losses as “net loss attributable to noncontrolling members capital,” leaving the net loss attributable to the company as $5.09 billion. > It’s unclear what this means, nor how OpenAI reconciled the removal of $3.74 billion in costs. I will not speculate further. It is very clear what this means, and no speculation is required if you understand basic consolidation accounting, which you would expect someone in his position to understand. It's not rocket science: when you have a parent company with entities it doesn't wholly own, the slice of losses belonging to the other equity holders is split out as "noncontrolling interests." Nothing is removed or hidden; the total loss is unchanged, it's just allocated to reflect that the parent company doesn't own the whole. Framing it as OpenAI removing costs implied something sketchy and requiring speculation where there's only routine GAAP accounting. But it's even worse than this. So many of Ed's claims conflate the foundational R&D and capital expenditures these companies are incurring with the unit economics of their businesses. He seems woefully unable to understand that you could sped gobs of money on the former and still have positive gross margins that scale over time with the latter.
- Driver4732 2mo ago
  But how does that detract from the overall point that Open AI is losing billions of dollars? If there's an insatiable demand for AI compute, where's the profit?
  - ElProlactin 2mo ago
    First and foremost, it's about competent reporting. You can think a company is doomed and still expect people to report on it accurately. Zitron continually presents things in ways that create a hyperbolic narrative. Turning routine consolidation accounting into an unexplained mystery hinting at some sort of fraud is the perfect example of that. He does it so often and in such a way that I truly believe he just doesn't understand accounting. It doesn't take a rocket scientist to understand that OpenAI is losing money. But the question ("where's the profit?") assumes that profit is the thing being optimized for. It isn't. There are basically three buckets here: cost of serving a query, cost of training and capex for capacity. The first one is unit economics. The other two are bets on the future that get expensed against present revenue. A company can serve every query at a healthy gross margin (OpenAI has improved margins considerably) and still have a $9 billion loss because it spent $12 billion training a model that generates $0 this year. Zitron constantly blends everything into a pithy "they lose money on everything" narrative, which just isn't accurate. The thing is that OpenAI could have a very different P&L if it chose to, say, stop training the next model. The problem, obviously, is that if you stop training the next model, the competition might eat you. So right now you have a situation where the the frontier model you spent $12 billion on depreciates in about 18 months, the GPUs depreciate on a schedule nobody agrees on, and you seemingly can't stop the cycle without risking your position in the market. This is the legitimate bear case, but the problem with Zitron is that he doesn't make it using an argument that is coherent and honest as far as the accounting is concerned. And the accounting is everything.
  - nr378 2mo ago
    High growth companies often have significant negative cashflow during the early high growth era, followed by positive cashflow in the years later down the line. This phenomenon is known as the J-curve[1], and Uber is a good example of how this can turn out absolutely fine. To some extent, the entire Venture Capital industry exists to finance precisely this dynamic! Nb. I'm not suggesting OpenAI is fairly valued, or that they will definitely become profitable, but "OpenAI is losing billions of dollars" doesn't really mean anything in and of itself. [1] https://www.uark.vc/blog/breaking-down-the-j-curve-the-journey-of-a-vc-investment https://www.uark.vc/blog/breaking-down-the-j-curve-the-journ... (many other similar such articles exist)
- beepbooptheory 2mo ago
  Maybe I am little confused here but what you just described here doesn't sound great either? What smaller entities who OpenAI is parent to lost 3.74 billion dollars? Or maybe just can you point to some primary sources about this? I am not too bright about this stuff.. I guess I always thought it was usually about having more money than when you started? Or at least about having a story of how you will have more money? Is that not right?
  - ElProlactin 2mo ago
    You can look up ASC 810-10-45. OpenAI isn't a single company. I haven't followed all the details with its structure change/recapitalization, but it's (I believe) a parent sitting on top of an LLC that outside investors like Microsoft hold a large minority stake in. The rules say that the parent has to report 100% of the LLC's revenue and expenses as if it owned everything and then, at the end, back out the share of the loss that economically belongs to the minority holders. So $8.84 billion is the whole loss, $3.74 billion is approximately the outside members' proportional share of it, and $5.09 billion is what's left for the parent. Nothing disappeared or was hidden. It's one number presented two ways because two sets of people own it.
    - beepbooptheory 2mo ago
      OK interesting. Who specifically are these other subsidiaries that clearly account for this loss though? I get it's just a trueism for those in the know like you, but it's pretty fascinating for me at least! Like is there one example company we can point to here? Even if there were like 20 subsidiaries and the combined loss was 3 billion, that would feel noteworthy on its own? Like to be absolutely honest, this point ends up just sounding more alarmist than the claim you took issue with originally. But perhaps I am just misunderstanding.
      - ElProlactin 2mo ago
        Microsoft owns a significant minority stake in the LLC to my understanding.
      - 2mo ago
- grey-area 2mo ago
  Can you explain which partly owned subsidiaries lost $3.74 billion and why it is legitimate to exclude that from their losses in a non-handwavy fashion? Your condemnation leaves me none the wiser and this does matter. This can of course be used to distort the financial picture and this is a significant amount, almost 50% of losses. Is this from the ‘non-profit’ which used to be OpenAI or something else? Smells like creative accounting to me and the CEO was accused by his board of dishonesty.
  - ElProlactin 2mo ago
    I explained this is a different comment. This is basic consolidation accounting per ASC 810-10-45. https://dart.deloitte.com/USDART/home/codification/broad-transactions/asc810-10/roadmap-noncontrolling-interests/chapter-4-intercompany-matters-with-noncontrolling/4-3-transactions-between-parent-subsidiary https://dart.deloitte.com/USDART/home/codification/broad-tra... I get that not everyone is an accountant or has had to become educated in accounting matters as part of their work, but you really shouldn't say "smells like creative accounting to me" if you don't have a basic understanding of the subject. This is like the least interesting thing about OpenAI's financials, and Zitron framing it as some sort of mystery hinting at fraud is one of the least effective ways to make a point given that it's absolutely a nothingburger. No loss is disappearing or being hidden. This is by-the-book consolidation accounting.
    - grey-area 2mo ago
      You have avoided answering the question. The accounting mechanics are uninteresting, lots of normal accounting rules are abused for nefarious purposes (see Enron et al). What is interesting is why this was done. Which subsidiary owns the loss and why?
      - ElProlactin 2mo ago
        Here's the logic since it's not that hard. Say Parent Co. controls Subsidiary LLC and owns 60% of it. Minority Corp. owns the other 40%. Subsidiary LLC loses $10 billion. Consolidation accounting requires Parent Co. to report the full $10 billion loss, as if it owned all of Subsidiary LLC, which it doesn't. Then, on the next line, it attributes the portion belonging to the other owner (Minority Corp.). There are two lines and one loss. Nothing is removed and nothing hidden. This is the definition of disclosure, not obfuscation. Note that the trigger for applying this is actually control, not ownership interest. My understanding is that OpenAI Foundation controls the public benefit corporation with 26%. And for an LLC, the loss split isn't automatically pro-rata by ownership. It follows the profit-sharing terms in the operating agreement, which is why the there's a Hypothetical Liquidation at Book Value method. Under an old capped-profit waterfall, nobody can verify the exact figure without looking at the operating agreement. "I can't verify the split" is a very different statement than "it's unclear what this means." Your "why" question: the reason it works this way is that consolidated statements are meant to show the business as an operating whole because that's what a controlling parent actually runs. You can't operate 60% of a data center or sign 60% of a compute contract. Every line (be it revenue, expenses, assets, etc.) comes in at 100% for that reason. The noncontrolling interest line then answers the separate question of how much of that whole belongs to the parent's own shareholders. One statement answers two questions (what does this enterprise look like versus how much of it is ours). As for your "who" question, the answer is simple: the other equity holders. Again, OpenAI doesn't own 100% of the entity. My understanding is that Microsoft is one of the other equity holders.
- matthewdgreen 2mo ago
  [flagged]
npilk 2mo ago
One example - he often compares current revenues to capex being spent on future capacity to claim that AI companies aren't profitable. (See this post for example: https://www.wheresyoured.at/am-i-meant-to-be-impressed/ https://www.wheresyoured.at/am-i-meant-to-be-impressed/ .) But this ignores that the capex spent to build more capacity is expected to generate additional future revenue. You don't need to recoup your capex immediately. A better approach would be to amortize the capex and compare revenues to that. Clearly he assumes revenue won't increase enough to recoup this level of capex (and it's very possible it won't) but IMO it's either a miscalculation of how the financing works or a deliberately misleading framing to compare current small revenues to a big scary capex number. I'm sure the above is simplified by the way, but I am confident that people who work at Goldman understand the relevant details extremely well.