Is Anthropic Worth Two Trillion Dollars?

Patrick Boyle On Finance

The episode examines the extreme valuation gap between AI software labs like Anthropic and hardware providers like Nvidia. It critiques the mat

Key takeaways

• Anthropic is reportedly seeking a $2 trillion valuation, which would exceed the combined value of the ten largest tech IPOs in history.
• Nvidia is currently trading at its cheapest valuation in over a decade relative to expected profits, despite being the primary beneficiary of the AI boom.

Main topics

• Anthropic IPO valuation
• Nvidia market positioning

Notable quotes

A great technology can still be a terrible investment if you pay too much when you buy in.

Conclusion

Investors should approach astronomical AI valuations with extreme caut

Transcript preview

Speaker 1 (0:00) 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 big tech IPOs of all time added together. So 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. Anthropix 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. But, 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. To be clear here, I am 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 $2 trillion? Well, normally, investment bankers have two main ways of valuing a company. They 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. price wherever the orders are. The spreadsheets are mostly there to make that number look somewhat grounded in reality. Anthropic 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. Its revenue was running at around $65 billion 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. The 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 centers. 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 centers, 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. We'll come back to them in just a moment. There have been just three IPOs since Labour 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. So, just how crazy is $2 trillion in valuation? 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's 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. That 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. You 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. Speaker 1 (7:01) 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 today, about three quarters of a trillion short. So, almost all of the $2 trillion is a bet on growth, and the higher interest rates go,