Is Anthropic Worth Two Trillion Dollars?

0:00This episode is brought to you by Indeed. You're ready to level up your business, but the pressure to find the right person to make that happen is intense. Indeed Sponsored Jobs can help carry the load. It boosts your job post to help it reach quality talent fast. Cut through the chaos with Indeed Sponsored Jobs. Get a$75 sponsored job credit at indeed.com slash podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed Sponsored Jobs.

0:31Brussels clean up nicely at Sweetgreen. Maple glazed, roasted, and edges perfectly caramelized. Sweetgreen's fall harvest is back on the menu, and the season's most overlooked little green vegetable is dressed to be devoured. You know what to do. Order on the Sweetgreen app. Anthropic, the AI company whose CEO has just asked his industry to slow the pace of AI development and ask the government to regulate everyone to make sure that they do, is expected to go public in the next few months, hoping to raise more money more quickly than any other company in history. Anthropic is reportedly seeking a valuation of around$2 trillion, which The Economist points out is about as much as the 10 biggest tech IPOs of all time added together.

1:22So this is quite a big one. And on paper, they've picked the perfect moment. The Nasdaq, an index of mostly tech stocks, is at a record high. A survey of purchasing managers has just shown US business output growing at its fastest pace in five years. And yet, IPOs are getting pulled. Jay Ritter, who runs the IPO initiative at the University of Florida, told Bloomberg that this is especially surprising with the Nasdaq at a record. Anthropic's public filing was expected to be released as early as late August, but still hasn't appeared. OpenAI has pushed its listing out to next year. Meanwhile, NVIDIA, the company making all of the money from AI, is the most valuable company in the world, with its share price up more than 1 ,600 % over the last four years.

2:17But relative to the profits it's expected to make, Bloomberg points out that it's the cheapest it's been in over a decade. So today I wanted to work out why the company selling the shovels looks cheap while the company digging with them is hoping to be valued at$2 trillion. dollars. To be clear here, I'm not one of those people who claim that AI is useless. People clearly find it useful, but a great technology can still be a terrible investment if you pay too much when you buy in. And that's what this video is about – the price. So first up, how do you get to two trillion dollars? Well, normally investment bankers have two main ways of valuing a company.

3:01They can forecast its future cash flows and discount them back to today, which is called a discounted cash flow model. Or they can look at what similar listed companies trade at relative to their sales or profits or some other key metric and apply an industry multiple. Then they take the company on a roadshow, ask the big investors what they'd be willing to pay and set the price wherever the orders are. The spreadsheets are mostly there to make that number look somewhat grounded in reality. Antropic poses challenges for both of these methods. There aren't many similar listed companies to compare to and forecasting the cash flows of a company in a new industry whose revenue has grown more than tenfold in a year is going to be a struggle.

3:50Its revenue was running at around 65 billion dollars a year in August. But as the FT's Lex column points out, these unofficial numbers should be handled with kid gloves. Now, a discounted cash flow model needs an interest rate as the time value of money matters. And this is the one dark cloud over that perfect picture I painted earlier. The same survey that showed that the economy is booming sent the 10-year Treasury yield to 5.23 % on Thursday evening, the highest it's been since 2004. That is roughly what you'd expect when an economy is running hot, inflation is sticky and the government is running a large deficit.

4:33The Fed raised rates earlier this month. Matt Kennedy of Renaissance Capital told Bloomberg that rising rates are a double whammy for companies like this. They reduce the value of profits that are years out in the future, and they make it more expensive to borrow money to build data centres. This might help explain the strange IPO cancellations we've been seeing. Holtec, a nuclear power company, with nuclear being the power source the tech industry is counting on to run its data centres, postponed its IPO last week, citing market conditions. SB Energy, SoftBank's data center developer filed before Labor Day and still hasn't started marketing its shares.

5:18We'll come back to them in just a moment. There have been just three IPOs since Labor Day and five of the ten largest listings this year are now trading below their offer prices. And for what it's worth, the last time the Fed was raising rates into a boom like this was 1999. 99. So just how crazy is$2 trillion in value?

6:06Then this is a job for Indeed Sponsor Jobs.

6:36to Sweetgreen, featuring Fall's best dressed. Make your move. Order on the Sweetgreen app. Because so many people talk about AI labs in terms of revenue rather than profits or cash flow, I'm reminded of a famous quote from Scott McNeely, the co-founder of Sun Microsystems. In 2002, after the dot-com crash, he explained to Businessweek just how crazy it had been to pay 10 times revenues for his company stock at the peak. And Sun was a good company. Its servers ran much of the early internet. The problem was just the price. At 10 times revenues, he said, to give you a 10-year payback, I have to pay you 100 % of the revenues for 10 straight years in dividends.

7:22That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which are really hard with 39 ,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R &D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at$64 a share? Do you realize how ridiculous those basic assumptions are? You don't need any transparency.

8:04You don't need any footnotes. What were you thinking? It's maybe the only time that I can think of that a CEO explained to investors in detail why they shouldn't have bought his stock. Unfortunately, though, in 2002, it was a bit too late. As crazy as those assumptions were, McNeely was still being a bit generous as he left out the time value of money. At the peak of the bubble in early 2000, the 10-year paid around 6.5%. At that rate, a dollar you receive in 10 years is worth a lot less than a dollar would have been worth that day. So even with no costs, no taxes and no R &D, an investor paying 10 times revenue wouldn't get their money back in 10 years.

8:50It would take about 17 years. Anthropic, if it was priced at$2 trillion, would be trading at around 31 times its revenue. So let's be even more generous than McNeely. Assume Anthropic has no costs, no staff, no taxes and no electricity bill and pays out every dollar it brings into shareholders forever. And instead of adding a premium for risk like you normally would, let's discount it at the treasury rate. Under those assumptions you never get your money back. Not in 10 years, not in 100. All of that revenue forever is worth about 1.27 trillion dollars today, about three quarters of a trillion short.

9:32So almost all of the two trillion dollars is a bet on growth and the higher interest rates go the higher that growth has to be. So if the normal math won't get you to two trillion dollars, then you need new math. Enter the TAM, which stands for Total Addressable Market. It's the amount of money a company might get if it captured an entire industry. While the metric has been around for a long time, the idea really caught on in the late 1990s when the internet analyst Henry Bludgett used it to argue that Amazon, which was trading at 240 a share at the time was worth$400 a share. Amazon then got there within weeks, which made Bludgett famous.

10:20He was later banned from the securities industry for life, which made him even more famous. The FT's Lex column has a nice tour of how these numbers have been growing for the AI industry. In May, SpaceX, which I had always thought of as a rocket company, but which also makes the Grok chatbot and owns Twitter, told investors that the market for enterprise apps, including its AI products, was$22.7 trillion, which is about three quarters of the entire US economy. Then, as Lex describes it, TAM inflation kicked in. The Wall Street Journal is reporting that Anthropics filing may cite a$30 trillion market, and last week Morgan Stanley estimated that degenerative AI could tap$60 trillion, so about half of everything produced on the planet in a year.

11:12Lex notes that Morgan Stanley is likely to be an underwriter on Anthropics IPO, which is of course just a coincidence. Bankers are famously conservative when estimating the value of things they can charge a percentage of. In just four months the addressable market grew by$37 trillion, which is faster than anthropics revenue and quite a bit faster than the economy it's supposed to be carved out of. You might be surprised to hear that companies don't always capture much of the TAM that their valuations are based on. Uber touted a$12.3 trillion TAM when it listed in 2019. Its annual revenue today is under$60 billion, so they still have 99.5 % of their market ahead of them.

12:01WeWork had a$3 trillion addressable market and then went bankrupt. That market, I guess, went unaddressed. Then there are the really big numbers. Anthropic's internal research arm has modelled an extreme scenario in which AI adds over$10 trillion to US GDP by 2030, which Lex's back-of-the-envelope maths turns into about$100 trillion of equity value today. Beyond that is recursive self-improvement, AI that designs better AI, which then goes on to design even better AI, where so much economic value is added that money and asset prices stop meaning anything at all, which is one way to hit your price target.

12:48Elon Musk has predicted that AI and robots will make work optional, and that money will stop being relevant. For someone who expects money to become meaningless, he sure has been collecting a remarkable amount of it. I should point out that in such a scenario, I'll probably be a lot wealthier than Elon Musk, as while he might be worth a trillion dollars, I own this$100 trillion Zimbabwean node, which has also become irrelevant. So, how close are we to recursive self-improvement? Last year, Google DeepMind's Alpha Evolve found a better way of multiplying certain matrices than the one mathematicians have been using for 56 years, which is impressive.

13:34But, as House of L.A.I., a YouTube channel run by a computer scientist with a PhD, points out in her recent review of the research, the impressive results all had a scoreboard, a test with a right answer. Anthropic's own automated researcher closed about 97 % of the performance gap on its task, partially by finding ways to game the experiment. And when its best idea was tried at production scale, the improvement was about half a point, which was within the noise floor. To be fair to Anthropic, they published that themselves, which is more than most companies do with a disappointing number. If you'd like to learn more about where the research stands, I'd strongly recommend her video, which I've linked to in the description.

14:24It makes a nice change from numbers just being pulled out of a hat. Back on Earth, 18 months ago, Anthropic expected its 2027 revenue to be$12 billion, which, in a story full of optimistic forecasts, is the one that turned out to be quite pessimistic. And in August, Aswat DeModer and the Dean of Valuation wondered on the Prof G Markets podcast whether Anthropik's target might slip from$1 trillion to$800 billion as some of the shine came off. Seven weeks later, the talk is off$2 trillion. Now, forecasting in this area is hard in both directions. But anyhow. This episode is brought to you by Indeed.

15:11You're ready to level up your business, but the pressure to find the right person to make that happen is intense. Indeed Sponsored Jobs can help carry the load. It boosts your job post to help it reach quality talent fast. Cut through the chaos with Indeed Sponsored Jobs. Get a$75 sponsored job credit at indeed.com slash podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed Sponsored Jobs.

15:39Brussels clean up nicely at Sweetgreen. Maple glazed, roasted, and edges perfectly caramelized. Sweetgreen's fall harvest is back on the menu, and the season's most overlooked little green vegetable is dressed to be devoured. You know what to do. Order on the Sweetgreen app. So far, we've been talking about markets that don't exist yet, But the AI boom has also found a way to value buildings that don't exist yet. SB Energy, SoftBank's US data center developer, which I mentioned earlier, is hoping to go public at a valuation of around$50 billion. Now,$50 billion is quite an achievement for any company, but it's especially impressive when you consider that SB Energy hasn't switched on a single data center yet.

16:29As the FT's Lex Cullen points out, they've never built one themselves, although they did recently buy a consultancy that has built 15. Lex also worked out that at$50 billion, SB Energy would be valued at around 400 times its annual earnings before interest, taxes, depreciation and amortization. Its own perspective says that it will need$174 billion to build what it's already promised to build. Its new debt priced on Thursday yielding 9.75%, the largest junk bond offering on record, and its lenders won't let it pay a dividend until 2029. It's now pushed back its IPO while it waits for investors to feel better about data centers.

17:18Now, I can't lie to you, numbers like that have inspired me. I'm currently drafting the paperwork to list my own company, Boyle Compute on the Nasdaq. We also have no working data centers, but we do have an excellent PowerPoint deck, and I once successfully plugged in a Wi-Fi router, which is the same sort of thing. I'll be looking for a valuation of around$25 billion because I'm kind of hoping to attract value investors. Now, some traditional investors might see a complete lack of functioning buildings as a drawback for an infrastructure company. But in accounting terms, it's actually a tremendous advantage.

18:00A data center that's still being built sits on the balance sheet as a construction in progress, and construction in progress doesn't get depreciated. Jim Chanos made a similar point about the tech giant's GPUs. Chips that have been bought but not yet switched on don't get depreciated either. So, if you think about it, the unbuilt data center may be the ultimate high margin business. It uses no electricity, it needs no maintenance, and nobody ever complains about latency because the product doesn't yet exist. The only problem is that eventually someone will push you to build it, and building things is where it all goes wrong.

18:43Lex points to the Danish academic Brent Fleiberg's Iron Law of Megaprojects, that they come in over budget, over time, over and over. Getting a grid connection can take up to 10 years in some states. A Gallup poll found that 71 % of Americans oppose having a data center built near them. And SBE Energy's own filings warn that if a project runs late, the customer can in some cases buy it outright, potentially at a low price. Its main customer, by the way, is OpenAI. The bad news is that the day you switch your data center on, the depreciation starts. SB Energy only owns the buildings. The chips inside belong to its tenants, and chips age a lot faster than buildings do.

19:34Paul Kedrosky, in a research piece for Man Group points out that lenders are financing these projects as if they were long-lived infrastructure like commercial property, when the chips inside will be out of date in a year or two, which is a bit like taking out a 30-year mortgage on an iPhone. So, who's paying for all of this? Well, that's where things get a little circular. Let's start with SB Energy's parent company, SoftBank, which is paying junk rates too. It's currently marketing more than$11 billion of new bonds to fund its next payment into OpenAI, and the FT reported that those bonds went out at a yield of 9.75%.

20:18OpenAI needs the money, as the FT reports that it expects to burn through almost $280 billion by the end of 2030. Some of that goes towards leasing SB Energy's enormous Ohio campus for 20 years, which gives SoftBank's data center company the revenue it needs to justify its valuation. OpenAI is also an investor in SB Energy, and just to keep everyone properly motivated, it holds warrants that pay out if SB Energy's valuation ever reaches$80 billion. Then there's NVIDIA. SB Energy's filings show that NVIDIA bought$1.5 billion of its shares in August at a 10 % discount to the eventual IPO price, and will buy another$1.5 billion at the IPO.

21:10Nvidia has also agreed to guarantee up to$105 billion for the Ohio campus. The FT reports that Nvidia won't record any liability for this until OpenAI's leases begin in 2028, and in exchange the campus will run exclusively on Nvidia hardware for 20 years. If you watched my video on Big Tech's hidden debt, this will look familiar. So, SoftBank borrows at junk rates to fund OpenAI, which rents the building that Nvidia guarantees and fills with Nvidia chips. It's a very tidy arrangement. Boyle Compute is currently looking for someone to guarantee my Wi-Fi router. You see the exact same problem across the industry.

21:56According to the Wall Street Journal, SpaceX is renting compute capacity to Anthropic for$1.25 billion a month. And on the Prof G Markets podcast, Ed Elson pointed out that 85 % of Amazon's net income in its latest results came from unrealized gains on its stakes in Anthropic and OpenAI. For Google, it was 87 % from its stakes in SpaceX and Anthropic. Aswad de Mulder's response was that he used to hate valuing family-run conglomerates in Asia because to value one company, you needed to first value four others. Now, to value Microsoft, you have to value OpenAI. So, the industry has essentially agreed to buy each other's products, guarantee each other's debt, and mark up each other's valuations, which brings us to the biggest puzzle in the whole chain, NVIDIA.

22:52Nvidia is the company actually selling the picks and shovels in this gold rush. And business at Nvidia is good. Bloomberg reports that its sales have gone from about$27 billion four years ago to an estimated$410 billion this year. And its net income is expected to almost double. And yet, at less than 17 times the profits it's expected to make over the next year, Nvidia is trading near its cheapest level in more than a decade. Investors are now paying about half as much for each dollar of Nvidia's profits as they were last year. Jensen Wang, Nvidia's chief executive, told a Goldman Sachs conference this month that Nvidia is the world's first and only growth value stock, telling the audience that the company is incredibly misunderstood.

23:45It's not every day that the boss of the world's most valuable company pitches his stock to value investors, although as the founder of Boyle Compute, I know how he feels. So why is the shovel seller cheap? You might think the market simply punishes reality and rewards promises, but there are four fairly sensible explanations. First, the market is treating NVIDIA like a cyclical company at the top of its cycle. Its growth margin was 75 % last quarter, but analysts expect it to slip below 72 % by the end of the year, partially because NVIDIA has to buy memory chips from other companies, and those companies have been raising their prices.

24:31The memory maker Micron shares are up more than 180 % this year. On top of that, NVIDIA's biggest customers like Meta and Alphabet are building their own competing chips in-house. David Russell of TradeStation told Bloomberg that NVIDIA's margins are more likely to go south than improve. Cyclical stocks often look cheapest when profits peak, because investors back away, not trusting that the peak will last. Second, NVIDIA's revenue is everyone else's spending. and a lot of that spending depends on labs that are burning cash. TCW's Eli Horton told Bloomberg that NVIDIA's multiple only really makes sense if AI spending slows, either because the tech giants pull back or because of a regulatory framework that delays or shuts things down, which is more or less what Anthropix's CEO has just asked for.

25:30The Monday after his essay came out, the main semiconductor index fell almost 6%. The Economist and Lex have both pointed out that a slowdown could be good for the lab's profits. It saves them a fortune on computing, which is great for them, and less great for the companies selling the computing. Third, uncertainty can be valuable. Analysts know roughly what NVIDIA will sell next year. An AI lab could go bust or it could capture a slice of that$60 trillion addressable market. The finance academics Lubos Pastor and Pietro Vernissai argue that uncertainty about a young company's future profits can raise its value, and Barbaras and Huang argue that investors overpay for stocks that look like lottery tickets.

26:21Fourth, the two prices are set by very different people. Nvidia is priced every second by millions of investors, including short sellers who can bet against it. Anthropik's price has been set in private funding rounds, partially by cloud giants whose own profits go up when its valuation does. And nobody in a private round can bet against it. The economist Edward Miller argued back in 1977 that when pessimists can't bet against a stock, the optimists set the price. Which brings us all the way back to Scott McNeely. Anthropic, at$2 trillion, fails his test for reasonable pricing. NVIDIA, on the other hand, trades at 17 times its actual profits.

27:08And so far, those profits are growing. It's the only company in this whole story that passes the McNeely test. And it's the one being marked down. So, why don't the labs all just agree to take a break? Well, because a slowdown would also shrink the technological lead that allows them to charge premium prices, and their competitors don't appear to be taking one. The FT reports that cheaper open-weight models, mostly from Chinese companies like DeepSeek and Moonshot, are getting close to the performance of the Frontier models, and are taking market share. And on Tuesday, Anthropic and OpenAI both released cheaper models on the same day, 40 and 50 % cheaper than the ones they replaced.

27:56A price war is good news for customers, but it's hard to think of a less convenient time to have one than right before your IPO. Boyle Compute, I'm pleased to say, has been unaffected by any price wars, as we don't have any customers. The price cuts are part of a larger trend. A new study from Epoch AI estimates that the cost of getting a given level of performance from an AI model has fallen about 13-fold a year since 2023, which they say may be faster than for any other transformative technology in history, including electricity, computing, and DNA sequencing. They also found that prices fall fastest right after a new top model comes out, meaning that whatever premium a lab can charge for its best model doesn't last long.

28:49As Epoch points out, the AI boom is pushing up the price of everything that goes in, chips, power, even electricians, while the price of what comes out is collapsing. So this is great if you sell the chips, but worrying if you sell the thinking. Last week, a startup called TypeSafe AI launched a model called JEV, which is aimed almost exclusively at software developers. Its creators claim that it's up to 440 times cheaper than the frontier models for simple decision-making tasks. JEV was built on$40 million of seed funding, which is around 0.002 % of$2 trillion. dollars. Eric Gleiman, the co-CEO of the corporate payments company Ramp, told the FT that his company had cut its AI bill by 40 % by sending different tasks to different models, using routers that make it easy to switch providers.

29:48As he put it, you don't need a Ferrari to go pick up your groceries. He even asked whether we've reached intelligent saturation, a point that I feel I've reached some time ago. Now tech executives have always had a clever answer to cheap competition. Scott McNeely once said that open source software is free like a puppy is free, meaning that it costs you nothing upfront and then you have to look after it for years. That's the lab's best argument against cheap open models. Although we all know what cheap software running on cheap hardware eventually did to Sun Microsystems, which ended up being sold to Oracle for a fraction of its peak value.

30:30To be fair to the labs, there is a real bull case too. People are using these tools more and more. The FT-charted data from OpenRoute are a platform that routes requests between AI models, showing that weekly usage has grown by about 25 ,000 % since the start of last year. Alay Tavinsky, an economics professor at Yale, found that 22.5 % of Anthropics users were still using its models a year later, compared with about 13.2 % for OpenAI. DeModerin thinks Anthropics may be the one AI lab with real end customer revenue. And the analyst Ben Thompson has argued that if the labs build both the model and the software tools around it, they may be able to lock customers in and keep the profits.

31:21Although, RAMP's routers suggest customers are working quite hard to avoid being locked in. So, it's entirely possible that the AI labs eventually figure out a highly profitable business model. But, in the meantime, they'd like to sell you some shares. None of this means that AI is a fad. It may well change the world. The internet certainly did, but the internet gave us Yahoo, Lycos and AltaVista long before anyone had heard of Google. And it's possible that AI ends up more like email, something that we use every day that nobody makes much money selling. That would be great news for customers and not such great news for anyone who paid$2 trillion for the company selling it.

32:09An IPO is the moment when a company and its early investors decide that it's a good time to sell. It's also the moment when this whole circular chain gets a real market price for the first time. That's a bit of a trap for SoftBank. A big part of its balance sheet rests on its stake in OpenAI, which was last valued privately at$852 billion. dollars and Bloomberg reported in August that SoftBank has taken out a 10 billion dollar margin loan secured against its OpenAI shares. A listing would let SoftBank turn that paper value into cash but it would also put a market price on shares that have never traded.

32:53If investors decide OpenAI isn't worth 852 billion dollars SoftBank's collateral shrinks. Anthropik's IPO will be the first public test of what a pure AI lab is worth, which will also put a market price on Amazon's and Google's paper profits. The awkward thing for SoftBank is that OpenAI controls the timing. Sam Altman told Fortune that given everything happening with safety, this would be an ill-advised moment to go public, while OpenAI is reportedly in talks to raise money privately at a valuation of$1.2 trillion. So apparently$1.2 trillion is a price for professionals only. Aswad De Moderen pointed out that the dot-com correction happened as a collection of small things.

33:44Trees falling in the forest until you wake up and realize half the forest is gone. The pulled IPOs, the junk bond yields, and the delayed filings may be the small trees. His message to the AI companies is, show me the numbers, not just the words. And a prospectus is the one document that forces them to do that. Wall Street, meanwhile, is getting ready to sell a lot of shares. Jim Chaness expects this year to break the record for stock issuance. And the academic research on that isn't encouraging. Loughran and Ritter found that companies that issue new shares tend to underperform for years afterwards.

34:24And Baker and Workler found that when a lot of new stock is being issued, the whole market tends to do worse over the following years. Insiders, it turns out, are quite good at knowing when to sell. The investor Mike Paulus told the FT that while the lab CEOs are saying we should slow down and take care, the market is saying that the profit motive is overwhelming. We may look back, he said, and wonder why we didn't take them at their word. That may be good advice about AI safety, but we should probably take the sellers at their word about the price too. Because if you buy in at$2 trillion, a price that doesn't add up, even if you assume no costs, no taxes and no staff, and it doesn't work out, someone is going to ask you the same question Scott McNeely asked back in 2002.

35:17What were you thinking? Thanks for tuning into this week's podcast. The podcast is entirely supported by listeners like you on Patreon. If you'd like to support it, you can sign up using the link in the show notes. Have a great week and talk to you again soon. Bye.

35:37Fall has never looked or tasted this good. Sweet Greens Fall Harvest Menu is back with seasonal favorites dressed to impress and made to be devoured. warm roasted sweet potatoes, crisp apples, maple glazed Brussels, and crave-worthy flavors in the autumn harvest bowl, maple glazed salmon plate, and roasted bacon Brussels side. The season's most desirable menu has returned to Sweetgreen, featuring fall's best dressed. Make your move, order on the Sweetgreen app.