The question for investors, the ultimate question is: do you invest in this thing?
Oh, I have an answer for that. I can answer you.
Welcome to ProfG Markets. I'm Ed Nelson. It is October 28th. Let's check in on yesterday's market vitals. The major indices climbed with tech rallying for a second day. All eyes will be on Microsoft and Google's earnings tonight. Brent crude was volatile again, but ended the day around $114 per barrel. The yield on 10-year Treasuries was stable ahead of the Federal Reserve's interest rate decision out later today. And finally, Meta shares declined nearly 2% following the completion of its $25 billion stock sale. The sale was part of its plan to raise nearly $100 billion in equity for its AI ambitions. Reportedly, though, the offering was five times oversubscribed. Okay, what else is happening?
As we discussed yesterday, Anthropic's highly anticipated S-1 is out and investors are still digesting the filing. Today we wanted to get another opinion about the company's upcoming IPO and some of the questions that have gone unanswered, including its financial feasibility, Anthropic's governance, and also the state of the AI bubble at large. So, here to break it down is one of our favorite guests, Steve Eisman, the legendary Big Short investor and host of The Real Eisman Playbook. Steve, great to see you. I'm going to start general. What did you make of this filing? What jumped out to you?
Well, the thing that jumped out to me the most were two things. The first was there's an awfully long list of future capital commitments that add up to something. I mean, it depends what you include, what you don't include — 800 to 900 billion. You know, when you're at 800, 900 billion, what's 100 billion amongst friends? It doesn't really matter. So that's just one thing that is — I don't know if the word is concerning, but just the way these people operate is, you know, that's just what they do. So that's the first thing. What I thought was even more interesting was that the numbers are only through the second quarter. Now, I have heard that they're going to have to put out third quarter numbers before they go public, although I'm not 100% sure that's correct.
However, there are reports out there that at least have the revenue for the third quarter as well as the compute and infrastructure cost for the third quarter. And that actually tells a tale, because for those of us who, you know, have been paying a lot of attention, as we all know, in the first half of this year token maxing was at its height. And for those viewers who don't know what that is, token maxing is where basically software engineers were ordered by their companies to use AI 24/7 and to hell with the costs. But after the first half of the year, people got a lot more cost-conscious. The Chinese open-weight models took more market share. And so what I wanted to see was what happened in the third quarter after the token maxing was over.
And so if you look at the fourth quarter, first quarter, second quarter, and third quarter, and you look at two statistics — the sequential revenue increase and then the revenue divided by the compute infrastructure expense. So if you go to the fourth quarter of last year, which was really just before token maxing really took off, revenue growth was 43%, and the ratio was 0.69, 0.69 times, which meant, of course, that revenue was less than compute expense. Okay. First quarter, token maxing takes off. Revenue growth goes from 43% sequentially to 135% sequentially, and the ratio goes from 0.69 to 1.4.
And then in the second quarter, which was the height of token maxing, revenue growth jumps again to 147%, and the revenue to compute goes to 2.08 times. Now let's talk about the third quarter. Third quarter, token maxing is over. Sequential revenue growth goes from 147% to 45%, and the revenue divided by compute goes from 2.08 to 1.7. That tells you something. That tells you that the end of token maxing has had an impact. The other thing that I have heard — I haven't been able to confirm it — is that sometime in October, Anthropic cut its prices by about 50% to try and get back a lot more market share. So whether that's going to come out on the roadshow, I don't know, but it certainly would be the data points that I would be focused on the most.
Something that was notable looking through the filing is that a lot of those charts that they put up at the top showing you how the business is doing, they do not include Q3 at all.
Right. That's why I bring it up.
Right. And there has been speculation that that was an intentional decision in order to hide what seems like a reality, which is that the business growth is slowing quite significantly, as you have just explained.
Do you think it was intentional?
Only very intentional. That's all. Only very intentional.
Not intentional. Very intentional.
This gets to sort of a larger question about this filing, which is like, how much does it actually tell us? Is really the question that I'm trying to get at, because you point out the future compute commitments, which for me that was the most important thing that I read. I'm like, okay, they have narrowed their losses. They're getting to a better place. That's good. Oh, but hold on. $800 billion coming down the line. And in addition to those $800 billion in compute costs that we're going to see at some point, they also say that they're going to significantly increase capital expenditures, which to me tells me they're going to just build data centers, which seems like a massive pivot, a massive change to the business. I don't know if they're going to build data centers, but they're certainly going to be spending a lot more money. Maybe they'll rent.
You know, and that'll cost them a ton. I don't know. But clearly, I agree with you what you're saying. Put it this way: when you commit to $800 billion, your expenses are going up.
Yeah. How much they're going up, we don't know, because I'm not the CFO of the company. I don't know, you know, how this is all going to play out. I read one report from someone who argued that by next year they'll be spending 80 to 100 billion dollars in capex. So, you know, I don't — but I don't even know if that is expensed or does that go on the balance sheet? You know, it's unclear.
Right. But it seems as though eventually that's going to have to show up in the income statement in some way, whether it's through depreciation or whatever it is.
Yes. Yes, it's going to show up.
And it's not showing up right now. The way it shows up is at the very bottom of the document as basically like a footnote. So that's going to be a massive change. Footnotes matter. And then, as you say, it does seem that current Q3 revenue is a pretty important item that tells you something about the future of this business over the next, you know, near future, over the next 12 months. What I can't tell is, did this S-1 — did it really tell us much about this company, or is it telling us a snapshot?
I think it's very, very backward-looking because it's giving you a snapshot of the company at the height of token maxing.
And before Chinese open-weight models really started to take market share more. You know, imagine — like, I only heard a — I found a report that said that Anthropic cut prices by 50% to gain back market share. I don't know if that's true. Let's assume it is. That's an incredibly important data point before you go public, right? That you just cut prices by — you know, this is not 47 Free, you know, we cut them, we cut prices in half and we're bragging. You know, cutting prices in half could be dangerous. You know, the question then would be, okay, you cut prices in half. How much more market share did you get? Did your revenue go down? Did it go — did you take so much market share that your revenue went up? I don't know. But, you know, that would seem to me to be the most important question to be asked.
The question for investors, the ultimate question is: do you invest in this thing?
Oh, I have an answer for that. That I can answer you.
I was going to ask you — are those — I was going to — you kind of got to the point quickly. I was going to ask you, would you need to know the answers to the questions that you just brought up before investing? I assume the answer is yes, you would.
But I think, look, to me, the bigger, bigger, bigger question is: it just seems, you know, that there are no moats around this business. I mean, if it's the case that they actually did cut prices by 50%, that would reinforce the concept that there are no moats and that the only way you're going to gain share is price. Being in a business where you are committed to spend $800 billion, where your entire franchise is just simply based on price, is dangerous.
There is another interesting angle on this S-1, which was the governance structure.
Oh, please, it's ridiculous. I mean, what's there to talk about? You're a shareholder in this company. You have no rights. Okay, let's move on. If you want to play, if you want to invest in that company, that's up to you. You know, it's like it's been disclosed. You have no rights. Zero rights.
