Prof G Markets
00:22:56 · Scott Galloway
[00:22:56] S0: Ed, you talked about profitability. These gross margin... I mean, it looks like it's gonna have... Morningstar says it's a 100... At a 150,000,000,000, which it might be the end of next year, and a 30% free cash flow, which it looks like it's charting towards, or 30% free cash flow margin, that's 45,000,000,000 a year in potentially free cash flow in the next twenty four months against a $2,000,000,000,000 valuation. That's 44 times free cash flow. Palantir is at a 150 times, and there is no free... I mean, there is... I mean, this is the kind of multiple markets have paid for durable moat protected infrastructure businesses to be clear. And, Josh, the way I would summarize what you're saying is it's hardware versus software. Right? The ultimate moat is the Falcon nine or whether... Whatever the new rocket is called. Right? That is very hard. You could argue NVIDIA. It's not in hardware. It's in design and IP. So that's technically is... Yeah. That's a moat, I guess. But this to me... I I wanna be clear. I I I wouldn't feel comfortable saying in eight or ten years or even five years, this is the most valuable company in the world. But I'll say it here. I think at some point in the next forty eight months, if this company can sustain anything like the numbers and the lines, even if it decelerates to, like, five x growth. Right? And, also, I have a bias here. I have found... And this is anecdotal evidence, but occasionally anecdotal evidence is evidentiary, is that the product here is unbelievable. So I would say I think there's a real shot that this thing, when people get excited about it, bumps up to 4 or $5,000,000,000,000 when NVIDIA and Apple have a bad quarter and that for... I think this thing's gonna sit on the iron throne for for a bit.
00:24:41 · Josh Brown
[00:24:41] S4: It's an unbelievable product, and it is now undergoing this process of recursive learning. It's teaching itself to get better. It is learning the habits of hundreds of millions of individual daily users and conforming the way it works to those habits on an individualized basis, there has never been software development like that, like ever. So, what we have, you look at the large enterprise software players, they build a product, they observe the market. If it's vertical software, they understand the ins and outs of whatever. We make software for dry cleaners or we make software for people that manage payroll at large enterprises. It's a version. And then they update the version every three to six months and it's great. This is like updating based on what you, a normal person say to it. You're not a developer. You don't have a dev budget. The thing is getting better based on its interactions with you. I feel like that aspect of it is being glossed over. I would also say, if you are primarily concerned with the financial aspects of Anthropic, bear in mind what its cash balance is relative to how much it's raised. It really has not used up a lot of the cash that it's... So I wanna get into these numbers. Ed, I'll have you react to this. Okay. They said in the S1, they have 112,400,000,000 in cash and cash equivalents as of June 30. That's 80% of the 141,000,000,000 that they've raised over the course of six years since they founded the company. So they've raised 141. They're still holding on to 112. They have 19,000,000,000 in what they call securities and short term investments. Some of that is money market funds. So just like consider that liquid, let's say. So they've been pretty good with the money they've been able to raise plus the cash flow they've generated versus the costs of running this thing. I think it's fair to say that. What do you think?
00:26:50 · Ed Elson
[00:26:50] S3: I think that's totally fair to say. And that's why, you know, I I don't have big problems. I was thinking that we were gonna get this filing, and it was gonna be like non gap palooza, and they were gonna make all of these ridiculous adjustments, take out the training costs, do all of the... These gymnastics. They didn't do that. It was clear. It was honest, and it's very clear, as you point out, that they are making real efforts to be sustainable in terms of the amount that they spend. And I give them total credit for that. And I think it's something that we have given them credit for in the past. But the thing that I I... I'm a little stuck on is the fundamental business model itself because... And this goes... Scott, you mentioned the the cash flows. I think that that is a backward looking analysis that... And we're not paying enough attention to the fact that they have already signed up to spend $800,000,000,000. And we're not seeing any of that... Those dollars reflected in the income statement currently. They have a more than $160,000,000,000 compute agreement with Broadcom. They have a a $120,000,000,000 agreement with SpaceX, $110,000,000,000 agreement with Amazon. And to Josh's point about these moats, they have recognized that it's kind of a problem that they have to spend all of this money buying compute from companies that are actually their competitors in a lot of ways and that they have actually expressly named as their competitors. And they have said that that's that's
00:28:10 · Josh Brown, Ed Elson
[00:28:10] S4: What would you suggest they do? Because if they get caught without enough compute, it's probably worse than overcommitting. Like, given given where we are, like... Because then you definitely lose. If you can't do my work, you can't do my my workloads. Okay. No problem. Alphabet can. [00:28:31] S3: 100%. [00:28:31] S4: There's some some element. So what would you... If you... Let's say you had the ear of the business planners at Anthropic, what would you tell them to do if not lock up as much compute as you can on a guaranteed contract basis? [00:28:45] S3: Well, this is where I think I agree with you, which is I think they're probably get... Making the right decisions given the situation they're in. And by the way, they've told us what they're gonna do, and that is they're gonna start building their own compute. And this is what I thought was most important about the filing where they said that they're gonna build out, compute infrastructure that will require, in their words, substantial capital expenditures that will, in their words, quote, change the cash flow profile of the business. So for me, I I think their answer is like, we we can't we can't continue in a situation where Google might rope us into some onerous agreement because, you know, they're our competitor and we've named them as such. We have to be independent. But to me, that means spending tens of billions of dollars, which we're not seeing reflected. [00:29:33] S4: I think they could buy a Neo Cloud.
00:29:33 · Josh Brown, Ed Elson, Scott Galloway
[00:29:33] S4: I think they could buy a Neo Cloud. [00:29:35] S3: Maybe that's the answer. Maybe once all of the wreckage of the Neo Clouds has been sort of piled up, maybe they go in there and buy a Neo Cloud on the cheap. That... Honestly, I think that might be the answer. I think that's a good idea. But my point isn't to say they're making bad decisions. They're stupid. They... They've got it all wrong. I don't think that at all. I think that they've... You know, for what they've done, it's incredibly impressive. I just think that the position that they're in is actually very difficult. And I think that it aligns with your points, Josh, that they don't have much of a moat here. They're competing with these other companies that already have their own cash cows and these businesses that are incredibly profitable. They're plowing their money into compute. [00:30:14] S4: Who has more of a moat to you? OpenAI or Anthropic? So chat GPT or Claude. No. Which has a moat? Neither? [00:30:23] S0: Well, if momentum is a moat, no. In software, is very hard. I mean, your moats are intellectual property, human capital, culture. [00:30:31] S4: I'm more worried about ChatGPT. [00:30:33] S0: Well, the momentum right now is very much for Anthropic and slightly against ChatGPT. [00:30:38] S4: I a 100% agree with that. And the enterprise business Anthropic, the Claude Enterprise is much further along.
00:30:38 · Josh Brown, Scott Galloway, Ed Elson
[00:30:38] S4: I a 100% agree with that. And the enterprise business Anthropic, the Claude Enterprise is much further along. [00:30:47] S0: And they're less price sensitive. Like, there... A couple of things. Ed's your... Ed, your number about the the commitment, and that's used as the scary thing here is the infrastructure. The number is somewhere between 5 and 800,000,000,000 based on the reporting I've seen, and some of these are firm noncancelable contracts. Others are options with looser commitment language. [00:31:07] S3: The SpaceX one.