The increasing popularity of ChatGPT, which is a natural language processing tool powered by AI technology, has become a very hot topic in 2023. This advanced technology has certainly induced a significant impact on many different business sectors in terms of their intrinsic value. The following discussion will briefly reveal some valuation approaches to be considered for the companies with this cutting-edge technology.
There are two common valuation approaches available to value an AI company, namely the market-based approach and the income-based approach. The market-based approach determines the value of the company with reference to its comparable companies and/or recent sales transaction of company in similar industry, size or development stage. The mostly adopted valuation multiples for AI companies are the EV/EBITDA multiple and the EV/Sales multiple. With reference to the public company held by Global X Robotics & Artificial Intelligence ETF, the median of EV/EBITDA and EV/Sales multiple of the companies in artificial intelligence and robotics industry were approximately 19x and 4x respectively as at 31 July 2023 as extracted from S&P Capital IQ.
In general, it is very important that we must first identify the stage of development of an AI technology company whether it is at the early development stage or relatively more matured stage. At the early-stage of development, the valuation of the company can be calculated based on their potential for growth in the future and the strength of its intellectual property. While at the later-stage of development, the valuation of the company can be valued based on their current revenue and earnings. Once the stage of development has been identified, we have to consider the strength of its intellectual property as it will not only provide the company with a competitive advantage by protecting its unique technology from its competitors but also attracting investors willing to pay a premium to invest into a company with strong intellectual property portfolios.
An income-based approach may also be appropriate for valuing an AI company as such company often has its unique intellectual properties and different profit models from other companies in the market. However, this approach relies on significant assumptions, such as market growth, number of users, and pricing, which can greatly affect the valuation and may be difficult to test.
In addition to selecting an appropriate valuation approach, it is crucial to take into account the risks associated with AI companies when determining their values. Factors such as the capital investment in developing the product, the product life cycle of AI-related products, regulatory challenges related to the use of AI in various industries and countries, and the risk of talent retention should also be considered in the valuation of AI companies.
Overall, AI is a value-added technology for different companies, and AI developers are in the market spotlight. Accurately valuing these companies can aid in decision-making and financial reporting.