Prof G Markets
00:08:10 · Ed Elson, Josh Brown, Scott Galloway
[00:08:10] S3: Agreed. [00:08:10] S4: The bigger issue is how easy is it for the next model that's 10% more powerful or advanced to snatch away those customers and those workflows? To me, if you're gonna worry about something, it's not the headline growth rate no longer being 1300%, 1600%. To me, that's the concern, is there a moat? Is there a moat? And I wish I could tell you definitively one way or the other, but that's the thing that might give me pause in saying, yeah, you're right, this company's worth $2,000,000,000,000 right off the bat. [00:08:45] S3: What do you make of the profitability side? [00:08:48] S4: Well, there isn't any. [00:08:52] S0: There's that side. It's the dark side of the moon, Ed.
00:08:52 · Scott Galloway, Ed Elson, Josh Brown
[00:08:52] S0: There's that side. It's the dark side of the moon, Ed. [00:08:57] S3: Well, the... It's it's it's a little less nothing than than perhaps some people thought. At least, you know, I was thinking that we would see on the income statement, you know, several billions of dollars in losses, on a quarterly basis or or or in the in the first six months. And what we saw was a nearly $700,000,000 net loss where... Or operating loss at least. We're gonna set aside the $80,000,000,000 because that doesn't tell you anything that's associated with the value of the company going up. But nearly $700,000,000 in operating losses, which I thought was narrower than than I had expected. However, there was the other problem, which I'd like to get a reaction to, which is that we also saw further down the document that they have signed up to spend $800,000,000,000 on compute purchasing agreements at some point. And we don't really know how long over what time frame that's gonna be spread out. But to me, I'm like, oh, this profitability thing, which seemed like it was trending in the right direction, might actually be a total red herring because we're not seeing the truth. [00:10:04] S4: Respectfully, I have to interrupt because I think you have it wrong. [00:10:07] S3: Okay. [00:10:08] S4: The headline number that hit Twitter immediately, of course, is 80,700,000,000. And as has been extensively reported, I don't have to get into like all the details, that is due to the way that they have to report the financing of their expenses in a certain way.
00:10:08 · Josh Brown, Ed Elson
[00:10:08] S4: The headline number that hit Twitter immediately, of course, is 80,700,000,000. And as has been extensively reported, I don't have to get into like all the details, that is due to the way that they have to report the financing of their expenses in a certain way. [00:10:27] S3: I think that's stupid.
00:10:29 · Josh Brown
[00:10:29] S4: So... And that includes that $9,000,000,000 in compute figure. And just the way they account for that, the operating loss is the thing that people in New York or people that are managing money are more focused on. And that number, $693,000,000 down from 2,100,000,000 a year earlier. That is the more important number. And actually, ironically, Warren Buffett is instructive here. Huge Anthropic fan. No, I'm just kidding. Warren Buffett spent decades telling investors to focus on book value. He said, My job as the chairman of this company is to grow the nominal book value per share number. And then like eight or nine years ago, he said, Throw it out. It's the stupidest thing because of new accounting rules. All right, so let's say Berkshire Hathaway invests in plants and equipment, or they acquire something and the value drops, they have to write it down, like based on the accounting rules, which is a hit to book value. But then if that thing that they had previously written down increases in value, you don't get to write it up. There's no such thing. So it makes the exercise of focusing on book value almost nonsensical. And so he switched from that metric to other metrics that he then said, this is actually... So he focused more on things like cash flow. So with an Anthropic, it's not that we should ignore any number that looks bad if we wanna be constructive. That's not what I'm saying. I'm saying like the most bombastically negative numbers are gonna be the ones that they put on the cover of the newspaper or on the news. And of course, then the nuance is discussed. But in today's day and age, nobody reads articles. We read headlines and we react to headlines. So I think like, let's just be like a little bit fair and say this company understands that a certain point profitability will be expected.
00:12:33 · Ed Elson
[00:12:33] S3: The $80,000,000,000, I agree, that is irrelevant. It's relate... It... It's a good thing. It's it's associated with the value of the company going up. It's it's basically the the the the conversion, on a lot of those notes. So I'm with you. I'm talking about... And anyone who's like, oh my god. $80,000,000,000 in net losses. This company is screwed. Has it wrong. 100% agreement. I'm talking about the the future compute purchase agreements that haven't been reflected in the income statement yet, which they are going to pay for in cash and have said so. And they've they've said that they're they're going to invest in CapEx. And so what I'm saying is it seems as though currently the income statement isn't giving us a very accurate reflection of the trajectory of the company because they're about to spend significantly more amounts of money over the next whatever the time frame is, five or ten years. And we don't... They haven't told us, like, over what time frame that
00:13:35 · Josh Brown
[00:13:35] S4: I think that's exactly right. I wanna talk about the word loss, though, because it's loaded. Not all losses are losses, and not all losses, even if they are losses are bad. And sometimes in certain periods of history, when companies have come to the realization that they're in a land grab, the more important thing than accounting profitability is grabbing as much land as possible so that you can eventually generate the profitability that everyone wants. And the corporate leaders of the 80s and 90s mostly went to University of Pennsylvania and Harvard and Yale, and they were taught the Ben Graham textbooks about securities analysis, and they were taught management in a very textbook way. The leaders of today in Silicon Valley were schooled on John Malone and Jeff Bezos. And in those two examples, John Malone recognized that he was in a land grab. He had to buy every mom and pop independent cable system in every region of the country in order to actually build something that could eventually become profitable. And Bezos did it a generation later with the internet. He had to own e commerce and he had to become so scaled that profits would not only be possible, but inevitable. And in both cases, it worked. It doesn't work all the time. It's not a guarantee that Anthropic could pull it off, but I want you to understand the textbooks that this generation read, they're very different textbooks than classical finance. I would actually take it a step further. I'm not a venture capitalist, but if I were and Dario gave a shareholder update and said, we are projecting 25% profit margins in Q4, I would say, what the fuck are you doing? You have OpenAI on your ass. You have Gemini. You have free models being developed out there every day. Now you have Meta and Muse. What do you mean 25% profitability? What what are you thinking? It's the worst possible thing you could say. And I know on the show Silicon Valley, was, you know, there's a caricature, Russ Hanneman, who gets, he has to hang up the phone when he hears people talking about revenue, no revenue. I understand it's a punchline, but think about this. If any of these platforms are gonna be sticky, and I'm not predicting that they will, but let's say the goal is to be the first to amass 3,000,000,000 users. That's how you're gonna pay for all these compute leases and all this equipment and so on.