Prof G Markets
00:00:00 · S0, S1, S2, Mark Zandi, Ed Elson
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00:01:32 · Ed Elson
[00:01:32] S4: Welcome to Prof G Markets. I'm Ed Elson. It is November 3. Let's check-in on yesterday's market vitals. The Nasdaq declined as the tech sell off deepened. More on that in a moment. Meanwhile, the S and P 500 was flat and the Dow rose on hopes for peace talks with Iran. Brent crude tumbled more than 7%. The yield on ten year treasuries declined. And finally, Apple shares climbed after posting earnings that beat revenue expectations in John Ternus' first earnings call as CEO. Okay. What else is happening? Anthropic's third quarter numbers just came out, and they have complicated the company's IPO story. Revenue was $17,000,000,000, a 12 fold increase year over year. But quarter over quarter growth slows to 47%, down from a 144% in the second quarter. And for the first time, Anthropic put a total on its spending commitments, $895,000,000,000 for computing power and data centers, and nearly $70,000,000,000 is due in the next twelve months. That is more than Anthropic's current annualized revenue. This comes after Blackstone told investors that they expect Anthropic to receive a high junk rating after its IPO. Until recently, Blackstone had expected the company to receive an investment grade rating, the tier that lenders consider safe. So a lot to get into here. Here to discuss Anthropic and everything we've learned in the past few days. We're speaking with John Foley, head of the Lex column at Financial Times. John, good to see you. I'd like to start with the amendment to the s one, because that really seems like the big news. We had, a revenue number which looks good year over year, but also we know that the growth slowed. We had kind of expected that. I think probably the bigger number that that really warrants our attention is $895,000,000,000 over the next several years. That's the amount they're gonna spend on compute. So we now know exactly what the bill is going to look like. What were some of the... Your big, takeaways from the the new filing?
00:03:40 · John Foley
[00:03:40] S5: We do know that the compute bill over the next few years is gonna be very big. We already knew it was gonna be quite big. Being able to put this new number on it, $900,000,000,000, I mean, sounds enormous. That may also change as we go forward. It may get bigger. But the revenue is also growing really quickly. As you said, it slowed this quarter to about, you know, 1100% growth year on year, which slowed from, like, 1400%. I mean, these these numbers are completely unhelpful, basically, because these growth rates are so high. And extrapolating how... Exactly how much growth we're gonna see next year is really... I mean, I think it's a fool's errand. What we're looking at though broadly is that Anthropic has been guiding, we've heard, to revenue of about $200,000,000,000 in the year 2028. So even if it's spending, you know, like, a $100,000,000,000 a year on compute, the revenue still exceeds that. The question, of course, is whether you believe it can hit any of these numbers or whether these numbers will start to look small the closer we get to those deadlines.
00:04:37 · Ed Elson
[00:04:37] S4: If it does hit $200,000,000,000, it seems like this might be a business that that is feasible. The trouble is it seems like it seems like a a seriously big if. I mean, we we had revenue of $17,000,000,000. We also know that, you know, growth is obviously slowing, but also that prices appear to be coming down. And they said this, they had these price reductions from q two to q three. They're now coming out with these discounts largely due to the open weight models that we've been seeing that have been kind of flooding the market coming from China. I mean, is 200,000,000,000... Is that is that reasonable? Should we take that seriously? What do you think?
00:05:16 · John Foley
[00:05:16] S5: I mean, as you say, there are there are plenty of risks weighing on this, and the price war is a big one. The discounts that they put on their products, it seems, were quite small according to this new amendment, maybe, like, 3% of revenue in discounts. But really... And and if they do make 200,000,000,000, by the way, then a valuation of something like 1,400,000,000,000, which is kind of roughly in the ballpark of what we're talking about, wouldn't be ridiculous compared with companies like SpaceX. If you believe this, SpaceX's valuation is same too. But my my issue with this IPO from the beginning has been that it is almost impossible to predict with any certainty where these revenue numbers are gonna go. And we also have in this latest amendment some new tweaks to the risk sec... The risk factor section of the prospectus. Not huge ones, but things that remind you that there are some sort of, you know, unpriceable factors that may weigh on this. The one that they've talked about in the latest edition is this idea that they may be getting very close to or have passed what they describe as the moment of dramatically accelerated progress attributable to AI, which is like when AI starts basically improving itself more broadly. And when that happens, then they are supposed to step on the brakes in certain ways to make sure that AI is being developed safely. What does that do to the revenue? It's... Like, it really is impossible to say at this point.
00:06:28 · Ed Elson
[00:06:28] S4: One of the more interesting developments in AI over the past week was something that came from Elon Musk. He tweeted... Someone had pointed out how Grok, which is basically SpaceX's AI chatbot, their agent, that it wasn't working. And someone tweeted about this. And then Elon responded to that tweet. I'm just quoting Elon Musk here. Quote, the cost of serving Grok was unsustainably high relative to revenue, which basically encapsulates the entire concern about all of this. I mean, about OpenAI, about SpaceX, xAI, and also about Anthropic. I mean, if Elon Musk is telling us that that is what's happening, that basically the cost of training these things and then running these things is larger than the revenue. And as a result, he's having to shut parts of it down or dramatically pull back at least on spending it seems. I mean, it makes me think that Anthropic is headed for the same scenario. And now that we've seen the $900,000,000,000 and we don't have exact clarity on how that's going to play out, but we can assume based on what we do know that it's gonna be something like a $100,000,000,000 at least per year over the next several years. That's by the way very conservative because we know that there is more than $400,000,000,000 in commitments that they're going to need to pay over the next four years. So it just makes me think that's probably where things are headed, but maybe Anthropic can turn it around. I mean, what did you make of Elon's comments? And to what extent does it say something about Anthropic's future?