Prof G Markets
00:08:11 · John Foley
[00:08:11] S5: Yeah. I like money is finite. Right? So we we are focused a lot on the spending, but someone has to pay for all of this stuff in order for it to work out. Like Anthropic has in its... Going in its favor, rapid growth in what it calls enterprise business, what everyone calls enterprise business. So selling services to companies who tend to be able to pay more than consumers, who tend to be stickier, to use the jargon, than consumers. Of course, that... The money there is limited too, but Anthropic does have a head start. Grok is very much at this point in consumer product. If you're sent to sell consumer products, how do you fund them? You can either charge a subscription a bit, or you start looking at things like advertising, which is of course how Google pays for search. But there again, like, money is finite. You know, even companies like Google and Meta are now starting to spend beyond their means to fund this AI. So if they can at least fall back on enormous advertising businesses, which Anthropic and OpenAI cannot. So at some point, yeah, the... Like the question is, do you have to reduce the level of service because you just can't afford to pay for all those tokens? We'll have to wait and see. But Anthropic is leaning hard into the enterprise space, the idea that companies will pay for its products because they deliver some kind of measurable advantage that isn't otherwise available.
00:09:27 · Ed Elson, John Foley
[00:09:27] S4: Just looking at their their compute costs, in the current quarter. So, you know, in the first quarter of twenty twenty six, it was 3.3 or almost $3,400,000,000. The next quarter, it was $5,600,000,000. This quarter, it was $9,900,000,000. So it's getting progressively larger, but also the revenue is expanding dramatically as well, which makes you think, oh, it's okay. But, I mean, it seems as though these compute commitments that are coming down the line are going to absolutely balloon the compute costs. The quarter on quarter growth rates for revenue has fallen to something like 47, 48%, in these latest q three numbers, but the quarter quarter on quarter growth in compute costs went up almost 80%. So at the [00:10:12] S5: moment, that's increasing more quickly than the revenue. [00:10:15] S4: It seemed as though when the IPO came... The... When the original filing was... Came out, you know, there was a lot of, I would say, sighs of relief at the fact that their operating losses had come down so dramatically from last year. It came down to something like $700,000,000 negative operating loss. And the previous year, was more than $2,000,000,000 in that same period. It seems as though it's going to continue to go up. I guess the question becomes, do we actually think that this company is going to become profitable in the near future? Is it actually going to be profitable in 2027? Which I think was something that a lot of people seemed to believe coming out of that first filing? I wasn't sure of it myself. But what do you think?
00:11:00 · John Foley
[00:11:00] S5: In the second quarter, they, on an operating level, had achieved a positive profit, I think, and that's now swung back to a loss. So... And and then on an accounting basis, their loss is obviously huge because they have this sort of bizarre non cash paper loss based on the value of securities and derivatives that they've issued. So like predicting when it gets profit is also again really hard. Like I sort of feel like I'm abdicating my responsibility as a financial journalist and someone who analyzes stocks by saying that you just... It's just who knows. But I really do feel with this company is you are being asked to predict things that are impossible to predict. You could argue that this company doesn't really belong in the sort of sausage casing of a traditional public company because these things are so variable. But here we are. I think ultimately, Anthropic will tell us what it thinks it's worth and and we will pay it or we will not depending on whether we think that Anthropic is gonna be one of the winners. But like... But in terms of are they gonna achieve an operating profit? Well, you'd hope so. If they're if they're cash burning, then they have to find the cash somewhere else. They have to plug that gap elsewhere. One option is by doing it through debt, but as we've heard, they may not have an investment grade credit rating, which will make that more expensive and more difficult. The other is to just keep raising more equity, maybe a bit of both. So there there is gonna be a lot of pressure on them to show that they can be self sustaining from a cash flow perspective. And at the moment, they are not.
00:12:23 · Ed Elson
[00:12:23] S4: Yeah. It seems as though, I mean, they're gonna go out and raise close to a $100,000,000,000 in this IPO. That's not gonna cut it, I don't think. I think they're gonna need to raise a lot more unless their revenue can just absolutely skyrocket over the next year and be so much larger than the amount they're spending. I don't see a way which that's gonna be enough to get them by over the next several years. So it seems as though they're gonna have to raise more money, presumably debt. As you point out here, we now know according to the Financial Times that Blackstone told investors that Anthropic is not gonna get that investment grade rating that we all thought that they were going to get. It's gonna be a high junk rating. How much in your view does that matter? To what extent should investors really be paying attention to that?
00:13:11 · John Foley, Ed Elson
[00:13:11] S5: I mean, being able to raise funds cheaply and rapidly is really important. Everyone is doing it. Meta platforms was one that we found out last week is doing a big equity raising, because this this is a race. Everyone wants to... Wants to beat their rivals and you do that by throwing money into the furnace at this point. So not having an investment grade credit rating just makes that process more expensive. This is all stuff that should be referred. This is not to say that Anthropic will fail. It's not to say that it won't be a a, you know, one of the winners in the AR race, but it should all factor into the amount you're prepared to pay for the shares when it tells us what the price range is. And my fear is that people will just look past that and see this is a kind of scarcity play. There's only one Anthropic. I have to get in, and that would be potentially very risky for them. [00:13:59] S4: John Foley is head of the Lex column at the Financial Times. John, always appreciate your time. Thank you. [00:14:05] S5: Thanks. [00:14:08] S4: After the break, a brutal sell off in tech. And for even more markets insights, you can subscribe to my weekly newsletter simply put at edwardelson.substack.com.
00:14:26 · S6
[00:14:26] S6: Support for the show comes from If there's a weight loss goal you keep chasing and never quite reaching, you're not the only one. Weight loss by Hims can help you finally close the gap with access to a range of FDA approved GLP one medications, including the Wegovy pill and the Wegovy pen. People lost an average of 14% of their body weight at sixty four weeks in a clinical trial of Wegovy alongside diet and exercise. To get started with Wegovy, just go to hymns.com and complete an online consultation with a licensed provider who will determine if a prescription is appropriate. Ready to reach your goals? Visit himms.com/markets to get personalized, affordable care for weight loss, hair loss, sex, testosterone, and more. That's hims.com/markets. Hims.com/markets. Individual results may vary, and stopping treatment may result in weight regain. Weight loss by HIMS is not available in all 50 states. Wegovy is the registered trademark of Novo Nordisk AS. To get started and learn more, including important safety information, Wegovy to clinical study information and restrictions. Visit himms.com. Support for the show comes from upside. Gas, groceries, eating out. Even on the tightest budget, there's no escaping them. But here's what you can control. Getting cash back every single time you fill up, hit the grocery store, or go out to eat with the Upside app. The free Upside app gets you cash back on gas, groceries, and dining. The three things draining your wallet right now. Here's how it works. Open the app, claim an offer, pay with your credit card like normal, and get paid. That's it. And, yes, it's cash back. Not points you'll never use, no credits that expired. It's money you transfer straight to your bank account. And independent studies confirm Upside users earn significantly more than traditional rewards programs. Over a 100,000 participating locations means once you start checking the app, you realize how often there's an offer right where you're already going. Upside has given back $1,000,000,000 to its users. To find out how much you can earn, download the free Upside app and use promo code markets to get an extra 25¢ back for every gallon on your first tank of gas. That's an extra 25¢ back for every gallon on your first tank of gas using promo code markets.