Anthropic's Insane Valuation + The Future of Marketing

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1:27Support for the show comes from Section. The recent joint ventures from OpenAI and Anthropic point to the same thing. Enterprises are not going to get value from AI by just rolling out licenses. If you're deploying AI and you want real ROI, you need to invest in changing how people work. If you want to do this fast with a team who actually knows what they're doing, you should talk to our company, Section. This is actually a paid ad, but it's a little bit weird. Full disclosure, I'm an investor in Section as I feel that the part of AI that is most underinvested is what I call the adoption layer, and that is helping companies upskill their employee base to better leverage AI.

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2:51Scott Galloway:at 201-472-3656. That's 201-472-3656. All right, let's get into it. Our first question comes from Steve, who emailed us. He asks, I'm a simpleton in investing who listens to PropG regularly. I know both are different sectors, but can someone explain how Walmart, with revenues of approximately$713 billion and operating profit of around$30 billion, can have a lower valuation than Anthropic, which has revenue of approximately$70 billion and forecast a profit of around$2.2 billion. Is it forecasting revenue at$70 million? Is that evidence of a bubble? Are investors simply pricing in much higher future growth and profitability for Anthropic?

3:33So typically a stock price is meant to be the asset value, so just the land underneath the retail or the intellectual property and owns, plus the present value of growth opportunity or cash flow. So all of these assets should be able to create an asset or a series of assets that create revenue that is greater than the inputs to produce that revenue. That's profits. And then your growth or the multiple you get on those earnings, the P-E ratio is a function usually of how fast that is growing or how stable and durable those cash flows are. And the reason why SpaceX and Anthropic and OpenAI are going out at anywhere from 30 or 40 times revenues to 100 times revenues is that people look at the addressable market and think, wow, if this company continues to grow in fairly short order, it could be the most valuable company in the world.

4:30And right now, if you are buying in any of these three companies, there is your betting and non-zero probability that this could, in fact, be the most valuable company in the world. because these companies are going out at anywhere between$1 and$2 trillion, the most valuable company in the world, I think it's around$5 or$5.5. I can't remember if it's NVIDIA or Apple. So you do end up with companies that are low growth, not exciting, not in software, don't have the margins of technology. You know, the adjustable market for Walmart is pretty big. I think it has a 9 % or 11 % share of retail. It's probably never going to get above 20 % because consumers like at some point differentiation and want to shop at different places or regional friction, whatever it might be.

5:10But let's talk about TAM. I think Anthropic is 5 or 10xing every year. So people look at that and think, wow, that could be an enormous company at some point. And because it is, in fact, software at some point, when it hits breakeven, a lot of those additional revenues are going to flow to the bottom line. So what's the takeaway here? Let's look at the numbers. Fiscal 2025 net sales of$675 million at Walmart, adjusted operating income of$30 billion, operating margin of 4.4%. And the market cap as of late was$1 trillion. So that's roughly one and a half times revenue or 34 times operating income, which is actually pretty rich for a retailer.

5:47Walmart's operating margin has climbed from 3.3 % in fiscal 2023 to 4.3%. Walmart is just a different business. Walmart operates on the notion that their scale and their operational excellence, they can pass the savings on to a consumer. So there are only three things that matter or lines that matter around shareholder value. There's the top line, which is perceived value. The next line, the middle line, is the price you charge. And then the line below that is the cost to deliver that service. And all shareholder value is a function of the ratio between or relative distance between those lines.

6:22So Walmart is in the business of constantly pushing down the cost line. And then once you do that, some wonderful things happen. If you can either pass along the savings and pull down the price line that you're charging consumers, which is what Walmart does, and then the gap between the price you charge consumers and perceived value broadens and the value proposition goes up and you should expand share. And that's been Walmart's strategy the whole time is they don't, if they cut costs on operations such that they can ship a pallet of ginger ale to Arkansas more efficiently than someone else, they immediately pass those savings on to the consumer, and the value proposition of Walmart goes up.

6:57There's an old saying that starting to shop at Walmart is like getting a promotion in terms of the change in the quality of your life because you can now afford to buy imported beer versus domestic beer, if that's what you want to do. Other companies such as a Tiffany or Hermes, their job, they're in the job of pushing the perceived value line up as much as possible through innovation and scarcity and branding. And then that's wonderful because then the gap between the perceived value and the price they charge goes up, which should expand share. But typically what they do is they push, as they push the perceived value line up, they raise the price.

7:35Effectively, what you're doing in these companies is they're trying to, they're trying to push the perceived value up dramatically. They're also raising so much capital that they can offer these products at an incredible value. So supposedly Claude Pro or Claude Max, it costs$200 a month, but supposedly right now it costs them$5 ,000 a month for the compute and the chips to offer you that service. So they're trying to just capture a ton of share. These companies are growing incredibly fast and their total adjustable market seems almost infinite, which results in just kind of what I feel would be insane valuations.

8:08Let's talk about Anthropic. So get this, the annual revenue trajectory was 87 million in January, 2024, and it's 1 billion by 2024 and 9 billion by the end of 2025 and 30 billion by April, 2026. So as you can see, this company, I mean, Anthropic really is a miracle of American innovation. It was started five years ago. And if it was in Europe, it'd be one of the five most valuable companies. The current run rate is about 40 billion AR, according to people with knowledge of the company's financials, and the valuation was 380 billion post-money at Series G in February, and now it's in talks to raise money at a$900 billion pre-money.

8:45Internal documents project a$14 billion loss to 2026, no positive free cash flow until 2028 at the earliest. By the way, I think that's a couple years earlier than the projected positive free cash flow date for OpenAI. So at a$900 billion valuation and$45 million in AR, that's roughly 20 times forward revenues compared to Walmart's one and a half. They're just different businesses with different expectations. I would, what's the answer here? You know, which is a better value? The answer is yes. And that is, I think you want to invest in everything. I don't think you want to try and talk yourself into the illusion that you can find the needle in the haystack, buy the whole haystack, dollar cost in, low cost index funds so you don't pay fees or a lot of fees.

9:24So I do think there is a real serious bubble question. The bear case. Anthropic has taken roughly 72 billion in funding and does not have free cash flow projected until 2028. And AI, you know, at some point, AI is going to stop growing at the same pace. I think also, I think there's some existential threat from open way, open weight LLMs out of China, regulatory concerns. I think the next big populist movement isn't immigration or affordability. It's fans on both sides of the aisle. So, you know, are we in a bubble? Probably, but it's really hard to tell when the bubble is going to pop. It was obvious we were in a dot-com bubble in 1997, and yet the NASDAQ, I think, tripled.

10:10So it's very hard to time the market. And I think what you want to do is just always be in the market, always continue to save money and invest in the market and be diversified in low-cost index funds such that you don't have to try and figure out if Walmart or Anthropic is the better value. The honest answer is, I don't know. That's the bad news. The good news is, nor does anybody else. Yeah. Is it a bubble? Or are these companies going to go up because of the incredible TAM? I think the answer is yes. Question number two. Hi, Scott. This is Mark from Dallas. My daughter is heading to college this fall as an advertising major.

10:48She's looking at a career in brand or events management, but I listen to the pod and I hear your warnings. You've made it clear that Don Draper's version of advertising is dead, that the brand era is over, and that AI is coming for the creative class. My question is, is an advertising degree still a viable path to a high-earning career, or is it a waste of tuition in 2026? If this were your daughter, would you tell her to pivot now? Or is there a way to AI proof a career in this field? Thanks for everything you do.

11:29Scott Galloway:Thanks for the question. I get this question a lot. So I think a lot of it is words. I think that they should change the name of the degree to marketing or customer acquisition or I don't know, something that feels a little bit more to age because advertising, when people hear advertising, they think of a 60-second spot telling you you have opioid-induced constipation ads in the middle of CBS News. The broadcast advertising business is just in structural decline. It just is. And probably the, I would argue the kind of pivot moment that illuminated it was that Steve Jobs decided to take$6 billion out of broadcast advertising and go further down the stack and open 550 temples to the brand, and that was Apple Store.

12:09Scott Galloway:So he invested in distribution as opposed to pre-purchase branding. Effectively, the way you build brands from kind of 1945 to 1995 was Americans were sitting in front of a TV five hours a day and watching one or three channels. So you could literally reach the entire public with two or three nights of advertising. That has obviously fragmented. There are now hundreds of channels and hundreds of other options were vying for your attention. In addition, the cost to advertise on the Academy Awards has gone up fivefold, despite the fact the audience has declined by two-thirds. So one of two things has happened.

12:42Scott Galloway:Either broadcast advertising is a terrible value now, or back when I was growing up, it was an unbelievable value. And the reality is it's mostly the latter. And that is you could have a shitty shoe, a shitty car, a shitty salty snack, a shitty sugary beverage. And if you created these associations of European elegance or American masculinity or paternal love or maternal love, choosing them, choose Jif. You could put out a mediocre market, They capture all of the emotions of the majority of the nation on a fairly limited, you know, advertising budget and then sell 30 or 20 cents of peanut butter paste for two bucks.

13:17Scott Galloway:So that was the kind of the algorithm for creating shareholder value. And then with Google and weapons of mass diligence that came out from TripAdvisor to AI, you've seen a vast migration of capital out of advertising into distribution, see above Apple, or post-purchase branding, which is either influencer, social media, warranties, customer service, CRM, all that good stuff. So I don't like the term advertising. But marketing or whatever you would call it, customer engagement, customer ROI, we need better terms. I do think it's a decent education Learning how to communicate with people And actually communication is a better word And try to create emotion that results in margin And that is brand is kind of Latin for margin or emotion And what you want is irrational margins from consumers So I want to drive something with a stallion logo on the hood of my car A Ferrari I don't own a car actually Because it says something about me It says I'm masculine, successful, European grace, have the money to buy a Ferrari, please have sex with me.

14:22And I think the majority of really high margin brands are doing one of two things, making you feel closer to God or giving you the sense that you'd be more attractive to a broader selection set of mates. But I think that the skills you get in communications is a strong one, how to figure out a market, how to figure out what moves people, figure out distribution, figure out technology, different channels to reach them. So I think that you have, I think this is what I call, it's not the default career path it used to be, but, you know, it is, it does teach, I think, really strong skills. So the ad model, when I was coming out of business school, the titans of industry were Maurice Levy, Martin Sorrell, John Wren, so IPG, Omnicom, WPP.

15:09And these companies are kind of meaningless now. When I go to Cannes Lions, they used to be the masters of the universe. Now it's Google, Meta, Pinterest, Spotify. And these guys are basically like running Irish bars and hosting 10 or 12 people. You know, it's just like if you're under the age of 40, I would say just not going or getting out of the ad supported ecosystem. I just think that system is getting harder and harder every year. And the oxygen continues to get sucked out by Google and Meta. If you're already doing well in one of those businesses that still, you know, agencies aren't in the advertising business anymore.

15:40and they're in the kind of client management business, helping them navigate a very complex world and helping them do good media buys. What your daughter is talking about where I think there's huge growth is events and that is activations. And so I speak at a lot of these events and I just spoke at RBC in Vancouver, Canada. They easily spent two or$3 million on a 36 hour event for their most important clients. So I'll speak at Dreamforce. They probably spent 10 million. I just got off a live tour for Profit and Markets. there were six people managing the venues, the events, the lighting, the guests.

16:13You know, I think activations and people wanting to get out and touch grass, if you will, and events. Netflix will do a pop-up at Cannes Lions featuring their latest shows, and they'll spend a ton of time and money and energy. So we'll snap, we'll have something really cool. They'll take over a big chalet. So I think that if you're organized, creative, a good manager,

16:33Scott Galloway:I think event marketing is going to boom, if you will. But traditional advertising, wow, watch out below. And by the way, what I would tell my daughter is don't follow your talent. I wouldn't be like, oh, just do what makes you happy. I would say, find something you're really good at. That's your job. And going to college, just find subject material you think you're great at. Take a bunch of classes you otherwise wouldn't take to see if something surprises you. Try and throw in some STEM. Try, I would very much try and figure out a way to take classes that force you to write English or communication, because I think that's the basis of all storytelling, which I still think is the enduring skill.

17:09Scott Galloway:But boss, let's be honest, we can tell our daughters whatever we want. They're going to do what they want. But if your daughter, these are good problems. If your daughter's headed to college, you're obviously an engaged father. You know, I think that's kind of 90 % of success right there. Thanks for the question. We'll be right back after a quick break.

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20:07Scott Galloway:Welcome back. Question number three. Hey, Scott, my name's Seth. I just turned 40. I have a one-year-old daughter, a baby boy on the way, and maybe one more kid after that. I love being a dad, and I'm more family-oriented than work-centric. But career's still really important to me, and I want to move from middle management to executive leadership this decade. As I enter my prime earning years with my kids in diapers, I wonder if I'm at a career disadvantage compared to fathers who had started their families at 30 versus 40. Life pushed things back. career setbacks, finding the right partner, years of IVF.

20:49But here I am. I feel I need to be more present with my kids now, not less, but this may limit my professional growth. Having had your first son at 42 and raising young men while you're in your 60s, do you wish you had kids earlier? How did becoming a father in your 40s shape your ambitions and relationship with work? Thanks, Scott, and thank you for helping shape a healthier public discourse on being a man and father?

21:17Scott Galloway:So thanks for the question and congrats. If I could go back, it would be to when I had little kids. And, you know, those were the solid days for me. I think I'll look back on the happiest time of my life and I'll be when our kids used to bomb into our room on a Sunday morning and jump into bed with us. Look, there's no right way, there's your way. And that is, there's no such thing as balance. There's just trade-offs. and I can't stand it when thought leaders or people giving advice or whatever say, oh, you know, always prioritize family. You won't regret it. Yeah, maybe. We live in a capitalist society and money is not only freedom and optionality, it's health.

21:57Scott Galloway:People in the upper decile of income earning homes live seven to 10 years longer than people in the lowest decile. So I think you just have to get alignment with your partner and recognize there is no balance, there's a trade-off. So you might decide that you want to move to a lower cost part of the world, manage your finances tightly, and you and your wife decide that you're going to prioritize family and you're going to work 40 hours a week and coach little league and go to church and be a good American and have a really nice life. And a lot of people do that and are happy and move to a place where they can buy a house for$300 ,000.

22:31Scott Galloway:So that is, you know, there's a lot of people who are very happy living that life. I didn't want to live that life. I wanted more money. I wanted to live in New York. I wanted to be more, I don't know what the term is, I don't want to call it more relevant, but I wanted more curb success, if you will. And I've always been very insecure about money. So I made the decision for that tradeoff. And that is I got alignment with my partner and I said, there's going to be times when I'm on the road for two or three weeks. I used to, I was running a company called L2, which helped luxury brands benchmark their digital confidence.

23:05Scott Galloway:and luxury brands happen to be located a lot in Paris or Milan or, you know, I would travel to Seoul to meet with Samsung and then to Ingolstadt, Germany to meet with Audi. And I remember coming home a few times after being on the road for two or three weeks and I'd look and peer my head into my kid's room when they were your age and I'd notice they physically had grown since I left. I'm going to get all bummed out. But me and my partner decided that we wanted the optionality later in life that money affords you. I have a tremendous amount of balance right now. You know, I'm going to, I'm going to, I can fly home whenever I want.

23:41Scott Galloway:I'm in New York, and then I'm going to go spend some time with my kids. One of my kids is in the Dolomites hiking with his mom. And then we're all, you know, we're going to World Cup and we just get to do these amazing, have these amazing experiences. And we, I mean, I'm boasting now, but it came at a cost. I have so much optionality now and fun things in my life because, boss, I was working like 14 hours a day when they were babies. And even kids, I missed a lot. I don't want to, I missed a lot. Now, for me, it was worth it. And there's always a risk you work that hard and you don't get there.

24:16Scott Galloway:And then you're like, that's really a bummer. But I decided the one thing I could control was how hard I worked. And I made that sacrifice. And most importantly, I had alignment with my partner that that's what we were going to do. And she was very supportive of that. But it comes at a cost. I think you just got to sit down with your partner, establish what is really important to you, recognizing the realities of capitalist society where there's a lot of things that are just going to be easier for you and your kids if you have a certain amount of economic security. That comes at a, that in order to achieve that, it requires real sacrifice and real trade-offs.