Managing Editor’s Note: We’re at the convergence point for many of the technologies that are going to shape our future.
Artificial intelligence, to be certain, but also biotechnology, nuclear fusion, robotics, and quantum computing, to name a few.
And history shows that when transformational technologies collide like this… fortunes can be made.
Jeff’s getting into all the details – the exponential technologies on the path of convergence, a couple of companies he’s got his eye on, and how we can position ourselves to profit – in his Hyper Acceleration event next Wednesday, August 20, at 8 p.m. ET.
You can go here to automatically sign up to attend.
If you ask me what the discussions by Perplexity AI’s management team and its board over the last several weeks have sounded like, I imagine they’ve gone something like this…
We’re stuck. We’re burning through cash. We need to grow faster. We need more scale. What the heck, let’s go for it. The timing is good. The worst that could happen is they say no. We have to try something, something that will move the needle.
Something along those lines, I’m sure, as they were putting together their surprise offer to acquire Alphabet’s (GOOGL) Chrome internet browser for $34.5 billion.
On the surface, it might seem like an impressive offer, but the details matter.
And they show how crazy or silly – and perhaps even a tad unserious – the offer actually is.
Perplexity AI, at face value, might appear to be one of the leading players in building frontier large language models (LLMs). They are often misunderstood for that. In reality, the company acts as a middleman between users and a variety of LLMs that are prominent in the industry.
Perplexity’s software and value add is kind of like a router. It routes individual queries to the best-suited LLM to do the job. In a burgeoning technology market where new releases are coming out every month, or sometimes every week, there is value in this. After all, some models are better at certain tasks than others.
Perplexity AI’s User interface | Source: Perplexity AI
Its software architecture was designed to do the following:
Perplexity’s timing was good. It formed in 2022 and had its first major raise in the spring of 2023, months after OpenAI released ChatGPT. And because some frontier models were better at certain tasks than others, Perplexity was able to choose the best LLM for every query it received, with super-fast response times.
This was enough for Perplexity to grow to a $100 million annual recurring revenue (ARR) by this May. Subsequently, Perplexity just raised $600 million this summer and is now worth $18 billion.
It’s impressive. To go from a $150 million valuation two years ago to an $18 billion valuation today is phenomenal. And yet, it is burning through cash. After all, it has to pay to use the LLMs from companies like Google, Meta, xAI, OpenAI, and Anthropic in addition to paying for its own computational infrastructure.
Perplexity is squeezed in the middle, and it just recently introduced an even higher-priced subscription tier for heavy users at $200 a month in hopes of generating higher gross margins.
These types of numbers pale in comparison to OpenAI’s forecast $12.7 billion in revenue this year and its $300 billion valuation.
That’s why Perplexity’s offer to acquire the Chrome browser for $34.5 billion is so crazy.
The offer itself is almost two times more than Perplexity’s current valuation of $18 million. That in itself doesn’t make any sense, but the company claims to have the private equity lined up to make the transaction happen if Alphabet were to agree.
And Alphabet won’t agree to a deal like that. Not at that price, and it would only agree to a sale if it were forced by a court to do so.
Which is why the deal has been offered now.
U.S. District Judge Amit Mehta recently ruled that Alphabet violated antitrust laws and ran a monopoly in search. His ruling was clear and conclusive:
The court reaches the following conclusion: Google is a monopolist, and it has acted as one to maintain its monopoly.
Alphabet is now waiting for the judge’s decision on the remedies required to restore competition in the search market. The U.S. Justice Department has been suggesting to the judge that Alphabet divest the Chrome browser.
Hence, the timing of Perplexity’s offer to buy Chrome. How convenient.
But there’s one major problem… Chrome is worth a lot more than $34.5 billion. I have to say, I was perplexed when I read in the The Wall Street Journal that Chrome was worth somewhere between $20 billion and $50 billion.
After all, Chrome has 3.45 billion users and about 65% of the global market share. It dominates in both PC browsers as well as mobile browsers, due to Google’s dominant position in smartphone operating systems with the Android OS.
Considering also that Chrome is integral to both Google’s advertising empire and its user data harvesting, it’s impossible to overstate its importance to Alphabet’s overall business.
Now, let’s consider this… Apple is paid by Google $20 billion a year to maintain Google as the default search engine on its browser Safari. Apple’s reach of about 1 billion users with Safari is worth $20 billion a year in high gross margin revenue to Apple. That’s about $20 per user per year.
If we take a conservative multiple like five times annual revenue for Safari, we’d arrive at a $100 billion valuation ($20 billion a year x 5) for Apple’s browser business.
Perplexity’s offer for Chrome is $34.5 billion for its 3.45 billion users, which values Chrome at just $10 a user. Do you see the problem?
Safari is worth about $100 a user at a reasonable valuation multiple. If we were to use the same valuation multiple for Chrome as we did for Safari, we’d end up with a valuation for Chrome at $345 billion, 10 times higher than Perplexity’s offer.
Which is why Alphabet would never agree. But it’s also why Perplexity’s board approved the offer, and private equity backed it up. Because in the rare chance that hell froze over and Alphabet sold Chrome for $34.5 billion, Perplexity – and its investors – would make a fortune.
But regardless, no deal will happen anytime soon. Alphabet has already stated publicly that it will appeal whatever decision the U.S. Federal judge makes.
This could drag out for years. And if Alphabet were really forced to divest Chrome, it would certainly run a normal process for soliciting the highest bidders for the browser… something we covered briefly in a recent issue of The Bleeding Edge, where we spotlighted another company that’s already expressed an interest in acquiring Chrome…
The latest antitrust issues with Alphabet’s Google division are presenting what could be an incredible opportunity for OpenAI. A U.S. District Court judge has already found that Google holds an illegal monopoly over the internet search market.
This has resulted in the U.S. Justice Department asking that Google divest its Chrome browser. And not surprisingly, OpenAI has already publicly stated that it is an interested buyer.
Whoever the aforementioned “highest bidder” is, you can bank on it that the number will be a big, nine-figure number.
Why is it so valuable, and why is Perplexity so hungry for Chrome? Well, for the same reason OpenAI – or any number of companies – would love the chance at snagging Chrome for its own business.
Distribution, plain and simple.
Chrome provides Perplexity with something that it doesn’t have… distribution.
That’s the problem Perplexity needs to overcome. It needs to scale up enough to become a sustainable business delivering strong free cash flows. It can’t do that without a massive distribution channel.
But what the heck? Why not? Just throw and offer out there and see what happens…
The worst they can say is no.
Jeff
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
