The people who are invested in this company are not — it's not the widows and orphans fund. It's not an insurance company in Scotland. You know what I'm saying? Like it's Masayoshi's Son. What do you think he's telling them to do? The guy's a riverboat gambler. Go for it. It's Adrian coming out of the coma in Rocky 2 and telling him win. [laughter] This is — I don't even know, like profitability? What, are you high? [laughter] This is like, this is year three. It could be a 30-year battle for supremacy. In year three, the goal is lose money but make it count for something.
Today's number: $100. That's how much US consumers spend on restaurants per week on average. Ed, what fast food chain would I like to see in space?
What's that? I'd like to see Five Guys on Uranus. [laughter] I've been thinking about saying that all morning. [laughter]
Hey guys, if you haven't already, please be sure to subscribe to our channel for all things markets and hit the bell icon to get notifications for all of our latest episodes. Thank you.
Welcome to Prof G Markets. How are you, Ed? [laughter] How are you, Ed?
I'm doing very well. Doing very well. There's something about In-N-Out I could have thrown in there, but I just stayed away from it. I just stayed away from it. Too much, too far.
Nope. On brand, on point.
I missed you guys. You keep bringing on people smarter than me and it really bums me out. It makes me feel insecure. [laughter]
Well, we're going to have a great time tonight.
No comment. Oh, that's right. We're all going out. We're going to Casa Cipriana. Very fancy. I might have to put on non-athleisure wear. [laughter] [clears throat]
You have to put on your coat and tie.
I'm not going to put on a coat and tie, but I will put on a coat. I'm excited to see everybody. I haven't seen everyone in a while.
The business is rocking. I mean, markets is way down, but anyways, very excited to see everybody.
Excited to see you. Should we get into our episode?
Let's get into it with our favorite.
This week brought one of the most anticipated S-1 filings in recent memory: Anthropic's. The filing answered some big questions, including how quickly revenue is growing and how much the company is losing. But it also left some unanswered, including who its biggest customers actually are. And there was even more drama in the AI world to start the week. Elon Musk took aim at the Neocloud industry, warning that many of these companies could be headed for a wave of failures and consolidation. In a post, he argued that debt markets are increasingly cutting off funding for companies without substantial revenue beyond AI data centers, leaving more than 200 Neoclouds vulnerable. His comments sent Neocloud stocks tumbling. That selling pressure adds to an already difficult stretch for the AI sector. CoreWeave and Nebius have both fallen more than 30% over the past month as investors reassess the risks of the AI infrastructure boom. So, there is a lot to unpack here. So, to help us make sense of what could go wrong with the AI trade, but also what could still go right, we are joined by one of our favorite guests, the one and only Josh Brown, co-founder and CEO of Ritholtz Wealth Management. Josh, great to have you back. Always good to see you. Um, I think we should probably just start with the thing that everyone's talking about right now, which is the Anthropic filing. We finally got to see what's going on underneath the hood. Um, general question: your reactions to the filing, what stood out to you?
I think the revenue growth is probably the thing that stood out to me most. We all understood that there was massive revenue growth, and of course there have been leaks and there have been comments from private investors. So I think directionally we all understood that there was a lot happening there. Um, but even I was surprised at what the actual growth is. So, um, it's off a low base, but it's a 1,300% increase for the first six months of this year versus the first six months of last year, the comparable period. So they went from $1.2 billion to $16.3 billion. That's a lot of revenue for a three-year-old business that began life as a public benefit corporation. I mean, no matter what you want to say about the other side, um, you know, the losses, which I'm sure we'll get into, which I just think like it deserves a moment's reflection. This company is on pace to do something on the order north of $30 billion in its third year in existence. And I think even the bears would have to admit that's impressive. Um, we understand there's customer concentration. We understand that we don't fully understand how the ARR calculation works. Is it a snapshot on one day that happens to be its best day and then they just extrapolate? Like, we all understand the different ways that that can be nitpicked and criticized, but they put it in an SEC filing. So, let's just go ahead and assume that they're not complete and total Bernie Madoff liars and that that is a reasonably accurate reflection of the sales that are happening to customers. I think it's worth reflecting on.
I totally agree with you. I think the increase in sales has been remarkable. The thing that people are saying has not been remarkable, or has been a problem, is on the revenue side. I'm more worried about the profitability side, which we'll get into. But on the revenue side, some point out that in Q3 the growth significantly slowed. I think it slowed to something like 40 to 50%, which sounds ridiculous because that's already a huge number.
It has to slow. You can't — right.
So Ed, you're right. But investors are worried about this because the assumption, I think, for a lot of them has been that 1,300% is going to continue — not forever, but at least for the next several quarters, perhaps the next year or so.
I'm going to disagree. I don't think investors are worried about it. I think it's almost guaranteed that you can't 16x revenue twice. Like, we understand that, because this is the exercise where you place a grain of rice on a chessboard and then two on the next square and then four on the third square and then eight and 16. We all understand that this company is not going to, in its life as a public company, do 1,600% growth. So I think what investors are more worried about — and maybe this is the more reasonable bear take on Anthropic and AI in general — is the stickiness of the platform and the durability of that revenue, more so than the growth rate. Like, let's take what you just said: 40 to 50%. If they go public and they come out and say, 'We think we're going to grow 40 to 50% a year, a CAGR of 40 to 50% for the next five years,' I think everybody would be okay with that kind of guidance. Not that they're giving it.
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 going to worry about something, it's not the headline growth rate no longer being 1,300%, 1,600%. 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 trillion right off the bat.'
What do you make of the profitability side?
Well, there isn't any. [laughter] There's that side.
It's the dark side of the moon, Ed.
Well, [laughter] it's a little less nothing 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 in the first six months. And what we saw was a nearly $700 million net loss or operating loss, at least. We're going to set aside the $80 billion because that doesn't tell you anything — that's associated with the value of the company going up — but nearly $700 million in operating losses, which I thought was narrower than I had expected. However, there was the other problem, which I'd like to get your reaction to, which is that we also saw further down the document that they have signed up to spend $800 billion on compute purchasing agreements at some point. And we don't really know how long, over what time frame, that's going to 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.'
Respectfully, I have to interrupt because I think you have it wrong.
The headline number that hit Twitter immediately, of course, is $80.7 billion. And as has been extensively reported — I don't have to get into all the details — that is due to the way that they have to report the financing of their expenses in a certain way.
So, and that includes that $9 billion in compute figure and just the way they account for that. The operating loss is the thing that people in New York, people that are managing money, are more focused on, and that number: $693 million, down from $2.1 billion 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. [laughter] 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. Like, if — 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 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 Anthropic, it's not that we should ignore any number that looks bad if we want to be constructive. That's not what I'm saying. I'm saying like the most bombastically negative numbers are going to 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 a little bit fair and say this company understands that at a certain point profitability will be expected.
The $80 billion — I agree that it's irrelevant. It's related. It's a good thing. It's associated with the value of the company going up. It's basically 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 billion in net losses, this company is screwed,' has it wrong. 100% agreement. I'm talking about 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 said that 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 larger amounts of money over the next — whatever the time frame is, five or 10 years. And we don't — they haven't told us like over what time frame that...
I think that's exactly right. I want to 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 you know, the corporate leaders of the '80s and '90s mostly went to the 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 [__] 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 Mistral. What do you mean 25% profitability? What are you thinking? It's the worst possible thing you could say.' And I know on the show Silicon Valley it was — you know, there's a caricature, Russ Hanneman, who 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 going to be sticky — and I'm not predicting that they will — but let's say the goal is to be the first to amass three billion users. Like, that's right. Like, that's how you're going to pay for all these compute leases and all this equipment and so on. Let's say that's the goal. Don't you owe your shareholders right now, as the fiduciary duty that you have to your shareholders, don't you owe them the best possible chance of getting to three billion users? And isn't the best possible chance of getting there throwing everything you have at scale, at land grab, right now? I think that's the way Sam Altman's thinking. So if you're Dario, you have to be thinking the same way. And look, if you don't think that they're going to raise $100 to $140 billion later this month when they go public, then that's a huge problem. But if you think that they probably will — and I do — I think they're doing what the shareholders expect them to do. The people who are invested in this company are not — it's not the widows and orphans fund. It's not an insurance company in Scotland. You know what I'm saying? Like it's Masayoshi's Son. What do you think he's telling them to do? The guy's a riverboat gambler. Go for it. It's Adrian coming out of the coma in Rocky 2 and telling him win. [laughter] This is — I don't even know, like profitability? What, are you high? This is like, this is year three. It could be a 30-year battle for supremacy. In year three, the goal is lose money, but make it count for something. I think they think they're making it count for something. They have enterprise users out the ass. They have normal, regular people talking to Claude like it's their therapist boyfriend. [laughter] Like, this is what they're supposed to spend the money on now. 'Oh, $80 billion loss.' Five years ago, Kid Rock took out a machine gun and just went to town on a pyramid of cases of Bud Light for cultural reasons. It's a big cultural moment in America. We're all very proud. Anheuser-Busch or Ambev ended up with millions and millions of cases of unsold Bud Light in inventories around the country. It was a huge problem. They had to eventually take that loss. That's a real loss. That's product that you can't sell. That's not what these quote-unquote losses are. So when I say sometimes a loss, not a loss, I'm not saying it's good. Like, negative $80 billion, I'm not saying it's good. I'm just saying this is not the same thing as, 'Oh, we literally lost money.'
They have an accounting loss for sure.
The $80 billion is a red herring.
So we're on the same page.
We're on the same page about that for sure.
I'm just waiting for — I'm just waiting for Scott to shut up already. [laughter]
Scott, chime in and shut him up. [laughter]
Yeah. Well, in the words of another great Rocky quote: 'I must break you.' [laughter] So, like Talia Shire, I wasn't expecting her to make an appearance here.
I had dinner with Josh last night, and just for shits and giggles, I want to put forward the thesis I put forward. And Ed and Ed and Citrin are going to literally turn in their graves. I think in the next 36 to 48 months, there's a non-zero probability that Anthropic is the most valuable company in the world. Revenue went from $1.2 billion to $16 billion in the first half. That's a 13x increase. No company's ever grown revenue this fast at that absolute dollar scale. Palantir's historic 85% year-on-year growth, viewed next to Anthropic's 1,200%, looks anemic. And Anthropic went from $9 billion to $65 billion, and that's 7x, and trades at what, 60 times revenues. So they're estimating — and I think it's a conservative estimate — that in '27 or '28 they'll be at a $200 billion run rate, which implies a multiple of 10, which looks cheap, or even looks reasonable compared to Nvidia, which I would argue is trading at suppressed earnings because everyone's worried about where the E goes. But I brought up that thesis last night with Josh, and he had pretty severe pushback. So I want to recreate it. Josh, I think Anthropic might be the most valuable company in the world in three to four years. Your thoughts?
I don't think they have the moat that SpaceX has. So SpaceX is sort of like the blueprint for how do you go public worth a trillion or two. People understand that what Elon has built is not replicable by any other company — the rockets, the payloads, the cost of getting satellites into space, the setup of Starlink, Starlink now going for 200 million users. Like, in a way, there's not an obvious competitor to SpaceX. There's another publicly traded company called Rocket Lab that is tiny in comparison. They have two launch sites. They're trying to put up a couple of rockets a year. I'm not saying it's not a good company, but like it's a dwarf. So when I think about what could be trillion-dollar companies, I try to think of companies that have moats that are like undeniable — like you cannot replicate these. It's not that you can't compete with them; it's that it's like almost a one-of-a-kind asset. Scott, I don't know that Anthropic has the type of moat that SpaceX or Nvidia or Apple. I just think those moats are unassailable, and Anthropic's we're not sure. It might be — you could absolutely end up right. I just don't feel as sure of that. OpenAI will go public in Q1. It might even get — if Anthropic is as well received as I think it's going to be, OpenAI could be a January IPO, and they could rip each other to shreds for the next three years, and Gemini in the mix. Like, it could be really — it could be ugly. It could be a price war. Like, I'm open to that possibility. I don't think you're definitely wrong. I just don't feel as good about agreeing with you as I would want to.
Ed, you talked about profitability. These gross margins — I mean, it looks like it's going to have — Morningstar says it's at $150 billion, which it might be the end of next year, and a 30% free cash flow, which it looks like it's charting towards — or a 30% free cash flow margin, that's $45 billion a year in potentially free cash flow in the next 24 months against a $2 trillion valuation. That's 44 times free cash flow. Palantir is at 150 times, and there is no free — I mean, this is the kind of multiple markets have paid for durable, moat-protected infrastructure businesses, to be clear. And Josh, the way I would summarize what you're saying is it's hardware versus software, right? The ultimate moat is the Falcon 9 or whatever the new rocket is called, right? That is very hard. You could argue Nvidia — it's not in hardware, it's in design and IP, so that technically is — yeah, that's a moat, I guess. But this, to me — I want to be clear — I wouldn't feel comfortable saying in eight or 10 years, or even five years, this is the most valuable company in the world. But I'll say it here: I think at some point in the next 48 months, if this company can sustain anything like the numbers and the lines, even if it decelerates to like 5x growth, right? And also I have a bias here. I have found — and this is anecdotal evidence, but occasionally anecdotal evidence is evidentiary — is that the product here is unbelievable. So I would say I think there's a real shot that this thing, when people get excited about it, bumps up to four or $5 trillion when Nvidia and Apple have a bad quarter, and that for — I think this thing's going to sit on the Iron Throne for a bit. It's an unbelievable product, and it is now undergoing this process of recursive learning. It's teaching itself to get better. It is learning the habits of hundreds of millions of individual daily users and conforming the way it works to those habits on an individualized basis. There has never been software development like that, like ever. So what we have — you look at the large enterprise software players, they build a product, they observe the market. If it's vertical software, they understand the ins and outs of whatever — we make software for dry cleaners, or we make software for people that manage payroll at large enterprises. It's a version, and then they update the version every three to six months, and it's great. This is like updating based on what a normal person says to it. You're not a developer. You don't have a dev budget. The thing is getting better based on its interactions with you. I feel like that aspect of it is being glossed over. I would also say if you are primarily concerned with the financial aspects of Anthropic, bear in mind what its cash balance is relative to how much it's raised. It really has not used up a lot of the cash that it's — So, I want to get into these numbers. Ed, I'll have you react to this.
They said in the S-1 they have $112.4 billion in cash and cash equivalents as of June 30th. That's 80% of the $141 billion that they've raised over the course of six years since they founded the company. So, they've raised 141, they're still holding on to 112. They have $19 billion in what they call securities and short-term investments. Some of that is money market funds. So, just like consider that liquid, let's say. So, they've been pretty good with the money they've been able to raise plus the cash flow they've generated versus the costs of running this thing. I think it's fair to say that. What do you think?
I think that's totally fair to say, and that's why, you know, I don't have big problems. I was thinking that we were going to get this filing and it was going to be like non-GAAP palooza, and they were going to make all of these ridiculous adjustments, take out the training cost and do all of these gymnastics. They didn't do that. It was clear, it was honest, and it's very clear, as you point out, that they are making real efforts to be sustainable in terms of the amount that they spend. And I give them total credit for that. And I think it's something that we have given them credit for in the past. The thing that I'm a little stuck on is the fundamental business model itself, because — and this goes, Scott, you mentioned the cash flows — I think that that is a backward-looking analysis, and we're not paying enough attention to the fact that they have already signed up to spend $800 billion and we're not seeing any of those dollars reflected in the income statement currently. They have a more than $160 billion compute agreement with Broadcom, they have a $120 billion agreement with SpaceX, $10 billion agreement with Amazon. And to Josh's point about these moats, they have recognized that it's kind of a problem that they have to spend all of this money buying compute from companies that are actually their competitors in a lot of ways and that they have actually expressly named as their competitors. And they have said that that's...
What would you suggest they do? Because if they get caught without enough compute, it's probably worse than overcommitting. Like, given where we are — because then you definitely lose. If you can't do my work, you can't do my workloads — 'Okay, no problem, Alphabet can.' So there's some element... So what would you — if, let's say, you had the ear of the business planners at Anthropic, what would you tell them to do if not lock up as much compute as you can on a guaranteed contract basis?
Well, this is where I think I agree with you, which is I think they're probably making the right decisions given the situation they're in. And by the way, they've told us what they're going to do, and that is they're going to start building their own compute. And this is what I thought was most important about the filing, where they said that they're going to build out compute infrastructure that will require, in their words, substantial capital expenditures that will, in their words, quote, 'change the cash flow profile of the business.' So for me, I think their answer is like, we can't continue in a situation where Google might rope us into some onerous agreement because, you know, they're our competitor and we've named them as such. We have to be independent. But to me, that means spending tens of billions of dollars, which we're not seeing reflected.
I think they could buy a Neocloud.
Maybe that's the answer. Maybe once all of the wreckage of the Neoclouds has been sort of piled up, maybe they'll go in there and buy a Neocloud on the cheap. That honestly, I think that might be the answer. I think that's a good idea. But my point isn't to say they're making bad decisions, they're stupid, that they've got it all wrong. I don't think that at all. I think that they've, you know, for what they've done, it's incredibly impressive. I just think that the position that they're in is actually very difficult. And I think that it aligns with your points, Josh, that they don't have much of a moat here. They're competing with these other companies that already have their own cash cows and these businesses that are incredibly profitable. They're plowing their money into compute.
Who has more of a moat to you, OpenAI or Anthropic? So ChatGPT or Claude? No — which has a moat? Neither?
Well, if momentum is a moat, no. In software, it is very hard. I mean, your moats are intellectual property, human capital, culture.
I'm more worried about ChatGPT.
Well, the momentum right now is very much for Anthropic and slightly against ChatGPT.
I 100% agree with that. And the enterprise business at Anthropic, the cloud enterprise, is much further along, and they're less price sensitive.
Look, a couple things, Ed. Your number about the commitment, and that's used as the scary thing here, is the infrastructure. The number is somewhere between 500 and 800 billion based on the reporting I've seen. And some of these are firm, non-cancellable contracts. Others are options with looser commitment language.
But the numbers I've seen and the gross margins I've seen show that if it maintains anything resembling the scale it's growing at, that it's going to begin to hemorrhage cash. And the question I would have is, if they're showing — and granted, I hate some of the suggested EBITDA [__] — but it does look like they have positive gross margins, and at this scale, wouldn't you expect those compute costs — it already has the second-greatest revenue per employee, just behind Nvidia, at a company that's five years old or six years old. If it just continues, even if its growth rate's cut in half, it strikes me that the cost for compute is going to go down. And at this scale, which is one-fifth, one-tenth, one-twentieth of the scale they're estimated in the next — estimated the next 24 to 36 months, it feels like those gross margins should only go up. And they are able right now to show something resembling being within earshot of substantial free cash flow without a fraction of the scale that it looks like they're going to be at in 12 or 24 months.
The per unit cost of compute is going down. It's actually crashing. The thing is, the usage is going up by so much that the overall dollar amount being spent on compute does not fall, it goes up. So the per-token cost is plunging like it should. This is the history of technology. That's good. The thing is, the services are so popular and in so much demand that while the per-token cost falls, the sheer explosion in everyday usage is rapidly outpacing that, so that the dollar cost of compute is not falling. It's rising.
But you'd make the argument that's actually a good thing because it shows how sustainable this bull market in AI demand should be. What do you think about that?
I think that the fact that the token spend — the spend on the tokens on the application layer end — is going down is a problem for Anthropic and OpenAI. So I think compute costs per token, per-token compute cost coming down is going to be very important for them, and I think the more that they can manage figuring out how to get as much compute as possible and paying the least amount for it, that's what they have to do. I think they're in a difficult position to do that, but if the per-token compute costs are coming down for them, that's a great thing. The only thing that's a problem is if the startups who are buying the tokens or buying the LLM usage from them, if that per-token spend is also going down, which it is, then that is also going to be a problem because it means that their revenues are going to start to slow. And that's what I worry about. And I worry that, considering the extent to which their business model is reliant on startups that are primarily funded with VC dollars — in fact, based on Ramp's data, they show that 80% of the spending on OpenAI and Anthropic is coming from 1% of the companies, and within that 1%, 80% of them are venture-backed. It seems as though they're reliant on capital continuing to rush in in Silicon Valley in the VC industry. They're relying on the stock market to stay buoyant.
I guess here's where I land, and I think this is where probably you and I agree, Josh, and you point this out about Masayoshi's Son, which is like — I think you said he's a riverboat gambler. Like, he's making these very bold bets. And I think that's what this is. And I think as a result, all I can say is it could be an incredibly valuable company, but I think they could also get caught in a very bad situation, and there is significant risk that they don't keep up with their costs and eventually they could go bankrupt.
I know you guys have spoken to Steve Eisman. We had him on our show recently. Maybe he said the same thing, but I do think that this is the crux of the matter. The Fortune 500 CEOs and CFOs two years ago said, 'Do AI,' to their employees. 'What do you mean?' 'I don't know. I'm on a stage every week somewhere and everyone's talking about these amazing things that they're doing with AI. Go do some AI.'
Do it. [laughter]
And in the early days of this — it's crazy to be talking about the early days, I'm talking like 18 months ago — [laughter] the way that enterprises were being built was like, you know, SaaS, like, 'Oh, here's how much per head per month. Go at it.' And then the token use just started getting out of control. Like guys pressing enter and just having the machine running for 48 hours over the weekend while they were in Cape Cod. Like, that's obviously not going to... So the guy from Uber came out in March and said, 'We blew through the 2026 token budget already for the year in the first quarter.' So now you have two things happening at once. And this is the real bear case. Number one, there's going to be some sort of budget on AI use company-wide, and they're going to have to make decisions like, 'Okay, this department gets X dollars in budget for AI. That department only gets Y dollars because what the hell are we doing here? We're not running experiments, we're running a business.' Okay, so I wouldn't say rationing token use, I would say rationalizing token use. Okay, so that's one thing. The second thing is the open-weight models, the free models, and just this idea that there actually are no switching costs. And a Fortune 500 business with a sophisticated IT department and an army of consultants — they look at the quarterly numbers, they say, 'Why are we, you know, seven cents per share behind expectations? Where do we trace it back to? Oh [__], look how much money we just paid Anthropic. Isn't there a way that we can swap in some of the — like we can use a harness, and the harness will be a governor on cost, and it'll decide, okay, for this leg of the trip we need a Mercedes-Benz, but that's only 10%. For the rest of the 90% of this trip, we'd be fine with an ox cart.' And all of a sudden you start seeing companies get smarter about the efficiency with which they utilize these tools. That's obviously bearish if you're trying to sell the premium furthest out on the frontier model at a premium price. So, to me, that's a really reasonable bear case. And probably you don't have to go so far as to say it's a price war. Maybe it is, but like it's the opening innings of people being a little bit more governed about how they're spending money and where the money goes.
We'll be right back after the break.
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We're back with Prof G Markets.
I wanted to hate this S-1, but after reading it, I just couldn't help but recognize some of the numbers here. And I've now, I almost say I've done a 180. But this is a company that, as far as I can tell, posted positive adjusted operating income. And I hate the word adjusted because it did take out, it excluded stock-based comp, but they posted essentially adjusted operating income for a company that's scaling at an unprecedented rate. What's so rare here is the combination at this growth rate. Most companies growing 13x are burning cash at an accelerating rate, not approaching profitability on an adjusted basis. And if you look at this thing in the pricing, it's pricing cheaper than Palantir and roughly in line with Nvidia while growing much faster than both. It just feels like on a risk-adjusted basis. And I want to be clear, there are existential threats everywhere. If all of a sudden, if a programmer at Anthropic actually tells the bots or the agents to be creative and have a sense of humor and it decides to disclose a billion people's porn usage, the next day it's shut down. There's all sorts of political existential risk. If Nvidia figures out a way to put their chip on an iPhone and go straight to client, if Facebook takes advantage of the agentic layer and connects the 500 million businesses they already have a relationship with to the 3 billion consumers they already have a relationship with, there are existential threats everywhere. But based on what we're seeing now, if they can navigate this landmine and continue to show a fraction of the growth they're recognizing right now, this thing becomes a cash cow trading at a multiple that makes Nvidia and especially Palantir look expensive.
But I'm not worried about the political risk. I'm worried about the financial risk that they've already signed up for. I'm worried about the $800 billion that are about to show up.
I worry more about the former.
I'd worry about both. You know, if the Europeans decide that they don't really want this in their country or there's got to be...
US frontier labs are out.
Yeah. There has to be a different version that conforms to the EU. And you know, this could happen in Asia too. Like I think we're so early in this, we don't even really know where the true political fault lines are. And to me, that's why, Scott, it's not pricing in line with its growth.
I think the market is being, I know it sounds crazy, I'm saying the market's being rational and then it's going to be a $2 trillion company with losses. I just think like we're not pricing this thing based on its growth rate and not taking into account all the existential risk that you just cited and I did. I think we're sort of doing both at the same time.
Do you think it goes out, Josh, at $2 trillion? Because there's been debate where it might get cut down to one and a half.
If it gets cut down to one and a half, it'll get to two. I think the enthusiasm around this company will be peaking right as it goes public. Like I don't think this is one of those things where, oh, they stayed private too long and the heat is off of this thing. I actually think they nailed the timing. And again, so Sam Altman did something interesting. He said, 'Actually, we're not going to go public until we figure out all these safety issues,' because this is the part he didn't say out loud: 'I don't want my S-1 to read like Dario's S-1.'
Yeah, because he's such a thoughtful guy concerned about us.
Well, no. Opportunistically, he's saying, 'Let Dario write the S-1 that talks about the extinction of humanity, and then I'll come public and say I've solved safety.' That might have been a tactical error. So I think this company is coming public just as the excitement around it is peaking, and that's a good thing that bodes well for the first few days of trading. I also think we now have some prototypes in the market for staggered liquidation periods for shareholders. Like, Cerebras didn't go as well as it could have, and then SpaceX came along afterwards and sort of did it better. And then, you know, whatever they've learned from that, they'll apply now to the Anthropic IPO. Like, we are learning to do $100 billion to $1 trillion IPOs in real time. The bankers have this instant feedback loop that they're benefiting from, and it's just a different day and age. So, do I think they could raise $100 billion? Yeah. Like, with their eyes closed, they could do it in the private market right now if they wanted to. What they actually need to do is say, 'We're the safe one. We're publicly traded. We're conforming to the SEC. We're answerable to all of the regulators around the markets, debt and equity. Like, we're the consumer-friendly safe. We're the ones that wring our hands in public about all the risks to humanity. Like, we're the good guys.' That's what they're doing here with the IPO. They don't have to go public right now. I know people said they better go public right now or they're screwed. I don't think that's true. I think they could do a Series G and easily raise $100 billion. I think this is the smart move. The ducks are quacking on Wall Street. If you never learn anything from me other than this, it's good enough. When the ducks are quacking, you feed the ducks. That's what they're doing.
All right. So Josh, we're increasingly hearing bubble claims. Ken Griffin and Ray Dalio both suggested last week that we're in a bubble. What's your response to the bubble question today?
If it is a bubble, it is the most pathetic bubble I have ever seen in my life. We are discounting. We are...
Factoring in growth skepticism every single day the market has opened. It is an anti-bubble. The only thing that you can credibly say is that it's an earnings bubble and that the profitability our tech giants are enjoying today is not sustainable. You could say that. You cannot say it's a valuation bubble. The semiconductor industry is the largest contributor to tech earnings growth and there's a lot of tech earnings growth and the semis are by far the biggest contributors. The year-over-year estimate for tech earnings growth is 65.6% for the quarter that we're in now. Just think about that number for a second. Okay? Sector-wide. It's not one company. 65% for the tech sector. If you exclude semis and semi-equipment, it falls to only 24.9%. So the entire tech sector is growing 25% and within that the semis are almost triple that. We're getting tech reports now that are continuing to crush. We had Western Digital print $4.64 in earnings versus $4.11 expected. Oracle $1.92 versus $1.74. Big earnings per share surprises. And yet we are seeing a contraction in the number of 52-week highs within the SMH, the semiconductor ETF. There has not been an above-average reading, which I would say is like 70% or higher names making new highs, since July. There are 0% 52-week highs for the semis. How, explain to me how that's a, why is it a bubble? How is it a bubble? Here are the three cheapest stocks in the market right now. SanDisk has a price-to-earnings growth or PEG ratio of 0.080. In a bubble, it's like five. Micron 10, Western Digital 0.13. Micron is selling at five times earnings. So, if this is a bubble, it is the worst bubble ever. I want my money back. I pity the fool that thinks this is a bubble. Another Rocky quote.
Nvidia's forward PE is 15 times earnings. This is the lowest valuation I think in history on a forward earnings basis you will, you have ever had the opportunity to buy Nvidia. Now I'm not saying it should be 30 times. Should it be 15? And if it is 15, the only bubble must be there for in this year's earnings. It's not in the valuation.
