Prof G Markets
00:04:06 · Paul Kedrosky
[00:04:06] S4: I felt like it was a like an MCU, like a Marvel movie, and I'd seen the trailer too many times. And so I'm like, oh, God, there's no spoil there's nothing left. It's all been spoiled. So an awful lot of what was in this was pre leaked, right? So some of it was obviously in a series of Reuters reports, Business Insider, it's been all over the place. And so I guess the surprising thing for me for the most part was how few surprises there were. That for the most part, the major nuggets in terms of customer concentration, the deceleration in revenue this quarter, which was a little bit masked actually in the filing itself, but nevertheless, you can kind of back it out. Those kinds of things had all been sort of pre leaked, as I say, as long as I've the trailer and it was too long. So that sort of stuff was there. The other things like customer concentration, I had expected a little bit more data on that. So like last year, I think their two largest customers were something like, from the disclosure table, I think it was 25%, and this year they kind of masked out a lot of the names and showed that their largest customer is sitting at around, I think it was 11 or 12%, and then everyone else is kind of masked out, so you don't really know where it stands. So all we can assume is that customer concentration, it may be that there's 10 companies that are 25%. We just don't know anymore because they're only showing people over 10% share.
00:05:21 · Ed Elson
[00:05:21] S3: I think the big question that that we were sort of speculating about is how unprofitable will they be? And will they pursue some sort of accounting gymnastics to mask their their lack of profitability. And I think that that is an open question, and we we will get into that. But from the outset, when we look at the operating losses... And and just to to clarify for people, that net loss of $72,000,000,000 that that is related to the the conversion, that is genuinely not not relevant because basically what that is what that is accounting for is the fact that they now need to pay back investors because their enterprise value has gotten so large. So actually, fact that that is... That net loss is so big reflects the fact that their valuation has gotten so high. So that's that's not the thing to focus on. The thing to focus on is the operating loss of nearly $700,000,000, which I thought was low or at least narrow compared to the six months compared to last year where it was more than $2,000,000,000. That to me was a pretty good sign. I have some some pushback to why that might be a good thing that we can get into, but your reactions just to that number, $693,000,000, in operating losses in the first half of this year?
00:06:44 · Paul Kedrosky
[00:06:44] S4: It was narrower than I expected as well. So, again, it's hard to know. I mean, having been on the other side of this, and not to be completely cynical, there's a lot of there's a lot of work goes on in terms of preparing a company's cost for an IPO, so the thing that they wanted to show, probably show their best face on, was what that operating number looked like. And so that's not particularly surprising that I guess it was a little better than expected, but nevertheless, like full full credit to them that I think this is nowhere near profitable and it's probably going to get worse in future because for a bunch of reasons we can talk about, but the number they presented there was I think I was thinking we'd probably see a number around 1,100,000,000 on that order of things, and so we're about 400,000,000 shy in a good way of that number for all kinds of reasons they can control, so it's not necessarily something that isn't written as the laws of physics that it has to stay at these levels, but nevertheless it's slightly narrower than expected. There were other things that I thought were interesting that they did that are... They're not nefarious, they're just things you need to keep an eye on, like non cash things like adding back stock based compensation, that was a material item in there. Anthropic is very, how shall I say, generous in terms of stock based compensation, and that will probably continue post IPO. So it's something that investors will have to keep an eye on because that's dilutive, obviously. And as a public company, one of the things that the consequences of having such high stock based compensation is that you have to buy back a lot of stock to avoid dilution of your your institutional... Well, all investors, but institutional investors in particular. So that item actually is consequential going forward because in terms of your sources and uses of cash, it's not all going to be going out the door again for funding compute commitments. Obviously have this very large number that they're going to be having to deal with in future in terms of trying to continue to protect investors, if you will, from future dilution given how aggressive they are in terms of stock based compensation.
00:08:41 · Ed Elson, Paul Kedrosky
[00:08:41] S3: Credit to them for not giving us a completely bullshit, you know, non GAAP adjustment. Where where... I I remember you and I were speculating, are they going to strip out the training costs? Are they gonna say, oh, don't worry about about what we have to do in terms of training these these things? They didn't do that. [00:08:57] S4: They didn't break it out cleanly, but they didn't try to do something non GAAP in terms of hiding it. That's exactly right. [00:09:03] S3: Yes. They didn't they didn't try to say, don't worry. It doesn't exist. It doesn't matter. [00:09:06] S4: Yep. Totally true.
00:09:06 · Paul Kedrosky, Ed Elson
[00:09:06] S4: Yep. Totally true. [00:09:07] S3: But... So I was I was looking for, okay. Well, the... Maybe this is gonna work. Maybe compute costs are actually, like... They're they're on a path to profitability, which seems, you know, plausible and, to be honest, imminent given what we saw. But then I go through the document. I wanna get your reactions to to what I make of this. And I get to the the liquidity and capital resources section. This is like page 161. It's it's way further down. And they go through some of their future compute agreements, and they they tell... They show us that they have an agreement with Broadcom with a $161,000,000,000 and Google, a $115,000,000,000. And you add it all up, and you realize that they are about to spend on a timeline that they don't tell you, but they're about to spend more than $800,000,000,000 on compute. And none of that is included in the income statement. And so I'm looking at the income statement now, and I'm thinking, does this actually tell me anything? Because it seems as though they've left all of their compute costs at the bottom as a footnote, not because they're trying to pull a fast one, I don't think, but because those costs haven't actually been reflected in their income statement yet because they're about to happen. So what do you make of that of that part?
00:10:26 · Paul Kedrosky
[00:10:26] S4: I think that's exactly right. And this is a deep structural problem that I think Moody's pointed to a few weeks ago in terms of the way that all of these commute... Compute commitments trickle back to and are consolidated in the financial statements because they're... Well, they're non cash obviously now because they're future commitments, but they don't even show up necessarily in the form of orthodox debt because you're... These are future commitments that are aren't actually debt instruments. They're more like a lease that's being discounted back to the... Their present value today. And I... They're all obviously highly consequential, and investors would need to think about it as you consider what the actual cash flow nature of the business looks like going forward. Because in particular, it's not just the size of the commitments, they're all noncancelable. Right? This is really important. This is not something where I say, you know what? It's not working out the way we wanted. We don't... We're not gonna have that commitment. No. These are all non cancelable capital commitments, with the only exception being that there's a growing capital commitment in terms of doing compute at SpaceX, which I think works out to about $3,000,000,000 a year. So much smaller in the great scheme of things than these other non cancelable commute commitments. And that I think is cancelable on a ninety day basis, ninety day notice, which speaks more to what SpaceX is trying to do I think than anything else. That they're desperate to have this cash flow coming back in because they in turn consolidate it as growing AI revenues when it's really not, obviously. This is just compute you're to someone else on a rental basis. So it's it's important, I think, to remember that the preponderance of the commitments are in future, they're massive, and they're all non cancelable.