Motley Fool Hidden Gems Investing - An Anthropic IPO Could be Here Sooner Than We Thought!

Starting point is 00:00:00 Tyler Crowe. Anthropic beats OpenAI to this one major milestone. This is Motley Fool Money. Welcome to Motley Fool Money! My name is Tyler Crowe. Today, I'm joined by longtime Fool contributors, Matt Frankel and John Quast. Today, we're going to cover our typical smattering of topics. We're going to go looking at the buy now, pay later space because of some recent news from Klarna. We're going to do our typical Thursday stocks on our radar. But first, we're going to start with news coming out of Anthropic. OpenAI's chief competitor, Anthropic, has recently hired lawyers and has been in contact with investment bankers about an IPO that could occur as soon as 2026. It could end up being the largest IPO ever, or at least in the top five.

Starting point is 00:01:02 Now, there's been a lot of hype for AI-related IPOs this past year in 2025. We've seen companies like CoreWeave go for almost $100 billion, or at least what they were looking for. We've seen companies like Fermi, a lot of pre-revenue companies in the AI kind of picks and shovel space going for massive valuations, even though they really haven't done anything yet other than put a plan on paper, and we're getting these very ambitious valuations. Matt, I have to assume that with this IPO Anthropix looking at, they're looking for a big payout here, right? Yeah, I love the word you used, ambitious valuations, because Anthropix, they're having success getting money in the private markets. In my opinion,

Starting point is 00:01:48 They would be wanting to step it up a bit. Right now, they're valued at about $350 billion, reportedly, in an ongoing funding round, to which Microsoft and NVIDIA have already committed $15 billion. It's not like they can't raise money privately. This is up from $183 billion valuations, almost double in a September funding round. It really shows you the magnitude of hype surrounding these big AI players. Now, it's not as if Anthropic is a pre-revenue business. So, it's making money. It expects to end this year with $9 billion in annual recurring revenue. Management's projecting that to rise to over $20 billion next year. And they have a pretty ambitious, again, target of $70 billion for 2028. But it all depends, really, on the rapid growth

Starting point is 00:02:37 in AI spending. And my real thought is, if the IPO market's doing what it's doing, and the AI market is doing what they're doing now, then 2026 is a good target, even toward the first half. If the market cools, this could be delayed significantly. It's going to depend on what they think they can get out of the market. But as it stands now, it's not surprising to see a sense of urgency develop. Yeah. I want to point out that the CEO of Anthropic, he recently said some AI giants are taking reckless hundreds of billions, spending risks on data centers and chips. He didn't name names, but I think that we're all knowing who he's talking about and his former employer, OpenAI. These companies are spending a ton of money. To Matt's point,

Starting point is 00:03:23 yes, they're making revenue, they're generating revenue, but they do need money because they are burning cash. Now, Deutsche Bank has done some research and done some projections. anthropic is expected to burn cash over the next let's say two three years but it's somewhat modest i i think that they'll be able to raise what they need on the other hand open ai is projected to burn at least 140 billion cumulatively through 2029 i i don't even know if my brain can comprehend that number so these companies are looking for funds so that they can execute on their business ambitions. They're already valued at over $300 billion and over $500 billion for OpenAI. These are some of the largest private valuations in history. It's only a matter of time before they

Starting point is 00:04:14 go to the public markets looking for money. I'm trying to start to think. Eventually, you see these massive numbers being put up in the private valuation space. granted the private markets in whether it be venture capital whether it be uh you know kind of insurance companies we're seeing companies like brookfield asset management or these kind of alternative asset managers that are have a lot more money sloshing around to make investments like this eventually the private markets are going to tap out with the amount of money they can give to it so the public market almost seems inevitable for these companies and to your point Anthropic is perhaps getting to it early enough before there's enough doubt or skepticism when

Starting point is 00:04:58 it comes to AI spending that perhaps these valuations start to wane before it's time to go public. Now, I'm not the most up-to-date, most advanced large language models and some of the things that these AI companies are doing, but it does seem, based on your other media outlet reports and people tech reviews and things like that it appears that google's gemini 3 is getting rave reviews and so good that there was even a recent wall street journal article that came out talking about a memo at open ai declaring a code red to basically improve chat gpt over some of the you know other and kind of delaying a lot of the prod side projects that they were working on outside of chat gpt is kind of like a hey we got to get this right because

Starting point is 00:05:44 the competition's coming fast. Thinking about that idea of this space is becoming more competitive, we're talking about an anthropic IPO and Google Gemini and all of that. With it about to be an IPO, we're assuming OpenAI is going to do an IPO because they've been flirting with it a little while. Maybe Elon Musk's XAI goes public. I kind of doubt that one. And we have publicly traded Alphabet today with a lot of large language models and kind of the lay of the land here today. Guys, of these artificial intelligence companies, which one as an investment interests you the most? Well, I think you hit the nail on the head, Tyler.

Starting point is 00:06:23 When it comes to the AI models themselves, if you have a lead, I don't think it lasts for very long anymore because of just how fast the space is iterating. And so I'm not really all that interested in the businesses that are creating the AI models themselves. I'm more interested in the companies that know what they want to do with the models as far as creating a business and monetizing it. I think that when you look at the companies that you just mentioned, Anthropic, OpenAI, XAI, and Alphabet, for me, Alphabet has the clearest roadmap of what it can do with AI. And so that really interests me as an investor. So I would

Starting point is 00:07:03 say Alphabet would be at the top of my list as far as companies you just mentioned. But But that said, XAI, with all of the things that Elon Musk is pursuing, all of the companies that he has, I would say that XAI also has probably interesting ways to monetize its AI ambitions. Yeah, I mean, the easy answer is Alphabet. I've been calling it the cheapest Mag7 stock for the past year or so. But to be fair, their AI models really didn't have that much to do with my thesis. It's really just the strength of the Google brand, what they're doing in cloud and things like that. It wasn't their LLMs. My longer answer is, it depends what all these look like valuation-wise and revenue-wise and momentum-wise when they go public.

Starting point is 00:07:46 That has a lot to do with it. Are we talking about a profitable open AI that has $70 billion in revenue, or are we talking about a company that's still hemorrhaging money? For me, it really depends how the IPO process shakes out. All right. Coming up next, we're going to talk about the evolution of the buy now, pay later landscape. We are by no means a breaking news sort of podcast, but I think there was a press release from Klarna that actually came out this morning. So it's probably the closest we've ever come to breaking news on the Motley Fool Money podcast. But we thought this would be a great jumping off point to discuss the buy now, pay later landscape because it was something that came out and it was very topical and really

Starting point is 00:08:25 relates to how this industry has been evolving. Now, a couple of months ago, buy now, pay later company Klarna rolled out a membership program in Europe, talking about membership tiers and various perks that you could get to it. And today, this morning, the company announced it was bringing more or less the exact same structure of those membership tiers to the United States. In the press release, they mentioned some of the membership program perks that they have, like airport lounge access spending perks like cash back and even a 16 gram rose gold looking not not a credit card but a 16 gram rose gold card so whatever that's supposed to be called in the future matt i i'm trying to figure out what going on here because what's going on here because

Starting point is 00:09:15 buy now pay later was supposed to be not credit cards this sounds like credit cards like what What are they doing here, and what is the point of what they're doing here? One of the most misunderstood parts of Klarna, particularly in the space, is that, one, they're a bank. Number two, they're trying to disrupt more than the buy-now-pay-later space. Just to put some numbers out there, about 2% of payment volume in the U.S., overall retail, is buy-now-pay-later today. Credit and debit cards combine for about 70%, which is about half and half credit and debit. The subscription products are not cheap. over $500 a year for the top-tier membership. But as you mentioned, they include things like

Starting point is 00:09:56 airport lounge access. Another big one is travel insurance, which I currently pay over $400 for an annual travel insurance policy. They're competing with cards like the Amex Platinum card that charges $895 a year. It might be a little more of a value than they're getting credit for. That's just one example of how they're trying to disrupt. I'm not 100% sold that the membership program is going to be a massive success. But it's an interesting approach to try to attract customers who might want some of these perks but don't want to sign up for such a high-end credit card. Yeah, John, I'm maybe reiterating my old guy shouts at cloud question here, but this is what I kind of struggle with this a little bit. We're just talking about

Starting point is 00:10:40 2% of payment volume is buy now, pay later. Credit cards are pretty much the dominant payments way of doing things and you know top end car subscriptions over 500 a year you get credit card like perks other buy now pay later companies like sezzle also have membership tiers with various perks it really seems to me like buy now pay later is doing their best to look more and more like credit cards so if me not the investor but me like the consumer like what's the hook really here to get me to actually switch. Yeah. What's interesting is it appears that 0% interest is what is attracting people to the buy now pay later platforms. And I know that you and I were talking, we pay off our credit cards at the end of the month. So we pay 0% on our

Starting point is 00:11:27 credit card, but not everyone is in that situation. 86% of users for buy now pay later, according to one Morgan Stanley report, their motivation to switching to that over credit card was the 0% APR. And so, you know, you have four interest free payments, you can extend it out over the entire year rather than just the month. And so, you know, that's one incentive. Now, I think we've all heard the stories of how you can, you know, use buy now, pay later for your Chipotle. And I think that we would agree that probably breaking your lunch down into four payments over the course of a year, maybe not necessarily the best thing. But here's what's interesting here. This is some data from Klarna that they're sharing. When it comes to canceling your credit card, switching

Starting point is 00:12:13 to buy now, pay later, people who earn $100,000 or more annually, they're the ones who are making the switch more than anyone else. And so this is actually kind of a higher-end consumer thing that is happening, not so much at the lower tiers financing a burrito. These are people who are making good money, and they're switching, and one of the big motivations is a 0% APR. You look at what Klarna just launched as far as its subscription services. Yeah, they're not necessarily cheap, $20 a month for premium, $45 a month for the max. But comparably, we're looking at the same ballpark as these higher-end credit cards. And so maybe they're looking at the data saying, we see who is making the switch to our platform

Starting point is 00:13:00 and we're going to offer them a higher incentive for this kind of a tier of consumer. And so very interesting move by Klarna. To that end, using subscription fees is like a major revenue driver for these companies. It seems like they're taking a little bit more of the Amex model versus the Visa and MasterCard model of just being payment processors and using that membership of me to really fund the business in that sort of way. And I want to get to this as the investment side of it, because Matt, we've talked about buy now, pay later before, especially when a firm went public. At the time, you weren't necessarily a big fan of buy now, pay later as an investable sort of space. Does these sort of evolvements or evolutions of the buy now, pay later space

Starting point is 00:13:46 changed your thesis at all? Well, I definitely misunderstood some of the key aspects of the buy-now-pay-later model. A lot of people still think this, that it's an inherently risky form of lending. Jason Hall said that yesterday on our show. As soon as the economy turned sour, we would see a big wave of defaults. But we got the 2022 bear market and interest rate spike. That didn't happen, so I decided to look a little closer. If you look at some of these companies, and Klarna's not alone, but I'm just going to quote their numbers, Klarna's net charge-off rate is 0.44% of their loan volume per year. That's roughly one-fourth of what Amex has, which is considered generally a top-notch clientele. The key thing to keep in mind here

Starting point is 00:14:30 is these are short-term loans. Klarna's typical loan is two months in length. The four-payment thing is usually split over a two-month period. They're generally linked to the recipient's bank account. It's really hard to default on them unless you literally don't have money in your bank account. It makes the probability of default much lower than you might expect. So, Klarna gets a 3% fee. Most of their loans are no interest. They get a 3% fee paid by the merchant, which is roughly what the merchant would pay to accept a credit card anyway. And if you extrapolate that over a year of, say, these two-month loans, you're talking about roughly an 18% yield, a 0.44% net charge-off rate, and low-cost deposits funding the business,

Starting point is 00:15:10 because Klarna's a bank. It's a recipe for a pretty strong interest margin. I've been dismissive of the buy now pay later space because I'm not a user of it. And I would say that I fall into the category of not really understanding the motivation from a user perspective, but also the investment thesis. But I will say that as I've dug in a little bit deeper here with Klarna and tried to understand what they're doing, I mean, to your point, Matt, as far as the perceived riskiness of this, if your top adopters are some of your highest income people, that is actually lower risks than what a lot of people might think. And so definitely something that I need to do a little bit more digging into and not be so dismissive because

Starting point is 00:15:57 it does seem like there's something here for investors. Coming after the break, stocks on our radar. In Toronto, every arrival is a statement and nothing says it better than this. Cadillac Optic was the number one selling luxury EV in Canada for 2025. Find your rhythm across a seamless 33-inch display and an immersive 19-speaker AKG surround audio system. This city demands agility, and Optic delivers with precision to make every drive extraordinary. Let's take the Cadillac.

Starting point is 00:16:23 Find out more at cadillaccanada.ca. Luxury sales claim based on S&P Global Mobility Canadian New Vehicle Total Registrations for Calendar Year 2025 for the Cadillac Definition of Luxury. As is our Thursday tradition, we're going to do socks on a radar. And this week, Matt, why don't you kick things off here? Yeah, I'm going to talk about one of my familiar favorites. It's Kinsale Capital Group, KNSL. And the reason I'm bringing this up, even though we've talked about it several times before,

Starting point is 00:16:45 is that it's trading at a rare discount. Kinsale has never had a down year, and it looks like 2025 is going to be its first one. I've owned the stock for a long time. It's down about 25% from its 52-week high, despite pretty excellent results from the business still. There's a big question mark about succession, which I think is giving a lot of investors fear right now. The chief operating officer, essentially the second-in-command, Brian Haney, who was thought of as the heir to the Kinsale empire, announced his retirement. When Michael Kehoe eventually steps down as CEO, then what? But Kinsale is a deep bench, and it's C-suite. Insurance stocks, if you look at all of them, they're down right now. It's not down for no

Starting point is 00:17:27 reason. Falling interest rates, for example, are going to hurt investment income. um and things like that but it's an incredible business that's trading at a rare discount so i'm going to go a little bit off script for my normal i'll call them like value companies i'm going to look at a real like i'll call them a deep experimental company this is eluma ticker is almu this is a company that just recently uplisted to the nasdaq we used to be a over-the-counter company and what it does is actually developed a breakthrough in what are called compounded semiconductors this is basically the idea of using some a we'll call it a gas layer or crystalline layer over your traditional semiconductor and it's one of the we'll call it a like a breakthrough

Starting point is 00:18:10 in terms of trying to build semiconductors for the quantum computing revolution these these compounded semiconductors basically let them run on less power they're more efficient it allows them to do a much broader spectrum of things especially when it comes to sensors And it's not the first time this type of technology has been implemented, but the way that Aluma has implemented their kind of adding that layer to the semiconductor is actually one of the cheaper ways of doing it. And they've been able to get a consistency that could actually mass market this product versus being this niche specialty product. And so, if we're looking at investments in the potential quantum space, quantum computing, quantum sensing, things like that, this could be one of those breakthrough moments that would make a lot of the quantum technologies that we have out there today much more affordable. And obviously, when you have that Javons paradox of once something becomes more affordable, the options for us using it get much greater. It's still, I would say, not completely without revenue, but it is basically a pre-revenue

Starting point is 00:19:19 company setting up a lot of deals with DARPA and other government agencies to test what they're doing here. But I think at the company's relatively small size, this is a really interesting opportunity for people to at least look at to see if this could be something that's big really down the road. Well, for my company today, we are going just three in completely different categories of the stock market. I'm going with Badger Meter, symbol BMI. This is a smart water meter company. Its customers are

Starting point is 00:19:50 municipalities. So those are hard customers to get, but they're pretty sticky once you have them. I think the value proposition for this company is that if there's a leak somewhere in the water line, you're wasting money and you're wasting water. So its smart meters detect those leaks, help track it down. So the idea is, hey, invest in some of Badger Meter's products and you'll save money in the long run. So when you look at this company financially, it's pretty attractive, I think. Revenue is growing by double digits. Its profits are growing even faster. It has a growing software business to complement its hardware business. So that can help boost margins. There's no debt on the balance sheet. And it's paid a growing dividend for over 30 years. Most

Starting point is 00:20:37 recently, it increased it by 18%. The payout ratio is still pretty low at down around 30%. So to me, Badger Meter looks like a safe business. You have a chance for both growth and income if you're an investor. And it's down about 30% right now, which is one of the largest pullbacks it's had over the last decade. So Badger Meter is one that I just found for myself. I just discovered it for the first time. And I think that it's worth looking into. That was definitely a stocks on our radar segment worthy of the Monty Python line, and now for something completely different. As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based

Starting point is 00:21:18 solely on what you hear. The personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to our producer, Dan Boyd, and the rest of the Motley Fool team. For Matt, John, and myself, thanks for listening, and we'll chat again soon.

Motley Fool Hidden Gems Investing - An Anthropic IPO Could be Here Sooner Than We Thought!

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