Motley Fool Hidden Gems Investing - Why Alphabet is the Winner from Anthropic’s Incredible Growth

Starting point is 00:00:00 Robert Brokamp Anthropic is one of the fastest growing companies in history, but there may be another winner investors can buy right now. Motley Fool Money starts now. Welcome to Motley Fool Money. I am Travis Hoyum, joined today by Rachel Warren and Lou Whiteman. And guys, we got to start with Anthropic. The talk of the week has been their announcement that they have gone from a $9 billion annualized revenue rate, maybe not the best measure for revenue because it's not actually, but it kind of gives you an idea how fast they're growing. So $9 billion at the end of 2025, $30 billion at the end of the first quarter. Rachel, this is just absolutely insane growth from a company at that scale.

Starting point is 00:00:51 Yeah, that $30 billion run rate is actually just quite mind-blowing. I mean, you put that in perspective, Anthropic essentially tripled its business in just 90 days. I mean, we usually, celebrate when a company doubles in a year doing it in a single quarter. I think it shows that at least for now, what many have framed as AI hype, if you will, it's turning into this massive enterprise land grab. You know, this isn't just about startup growth. This is, I think, very much a fundamental shift in how the enterprise world is adopting AI across industries. And I think something that Anthropic has really tried to put out there is very much this kind of safety and reliability angle with businesses using cloud, whether it's healthcare giants, tech companies,

Starting point is 00:01:31 or otherwise. And I think it's so doing. They've unlocked the corporate vault, so to speak. I think we're seeing businesses are finally moving past the experimental phase, and they're putting massive budgets behind these models. And that's creating exponential tailwinds for Anthropic. I feel like in talking about this, we risk parroting or extending the AI hype because, yeah, it's really hard to know exactly, to take a big picture look at this. I'd note that searches for Claude tripled over the last 90 days, according to Google Trends. That sort of lines up with the revenue. Obviously, I think those are related. We know this. Claude is having its moment. Claude is all we've heard about for the last 90 days or so. That's great. And if it's sustainable, it should

Starting point is 00:02:17 mean that it's a good business, probably a better business than the other AI giant that wants to go public. But I think to assume that this continues is lowercase foolish. I mean, look, there are natural limits here to what people can spend. Travis, I think I said it to you, but there was a viral LinkedIn post last week of a CEO bragging about their four-person company spending $125,000 a month on Anthropic right now. I'm just going to go out on a limb. I don't know anything about that business. But you cannot continue to triple that indefinitely. There's just not enough revenue there. So this is great. I think all of this does, though, on the revenue side is tell us what we already knew is that Claude is the only thing we've heard about over the last 90 days or so.

Starting point is 00:03:06 Yeah. And their focus on coding specifically really seems to be their differentiator. I know the $20 a month that I'm paying them is probably not really moving the needle. It's really those enterprise customers that are spending hundreds of thousands of dollars per employee. The other angle to this, and this came out yesterday, was that they just signed another deal with Google. Google happens to own 14% of Anthropic, but this is going to be for use of TPUs. So they announced this with Google and Broadcom, and they're using TPUs. So we hear a lot about NVIDIA owning the market for artificial intelligence, it seems like right now the momentum is behind Anthropic and Anthropic is moving to TPUs. So that seems pretty notable, Rachel. Yeah, it's a really interesting

Starting point is 00:03:54 dynamic. Obviously, the move helps Alphabet's Google, right? I mean, Google has its own AI Gemini, but it wants to be the landlord for everyone else through Google Cloud. And of course, giving Anthropic a large supply of its own specialized chips or TPUs is another key piece the puzzle there. But I also think it really demonstrates the very strategic approach that Alphabet's taking. You know, by providing significant computing power, they ensure that Anthropic, which is, of course, a major competitor to OpenAI, remains on Google Cloud. And that strategy means that Google can benefit regardless of which AI model gains dominance. And I think the other kind of takeaway element here is something of a warning to NVIDIA. Obviously,

Starting point is 00:04:35 I don't think NVIDIA is going anywhere. You know, they have a significant backlog. They're a key the space, but it shows that Google's custom chips could be a viable alternative. And I think we might see a world in which other AI startups become less reliant on NVIDIA hardware, you know, 10, 15 years in these years ahead. I mean, I guess benefiting Anthropic to hurt open AI, you know, I think it's maybe be careful what you wish for. I mean, Google's core business on the AI side, I think, is probably a competitor with them. And if anything, Anthropic has shown itself to be maybe a smarter competitor or a more disciplined competitor.

Starting point is 00:05:17 Well, more disciplined, for sure. We've been talking about that for months. I just kind of can't seem to get out of it. I mean, if I'm Google, maybe I would prefer OpenAI to stomp Anthropic in some regard. But look, I still worry that all of these models are heading in the same direction and they're all sort of commoditized. And so having the multiple ways to win with partners, with investments, with kind of just being the service provider versus the model, that makes a lot of sense to me.

Starting point is 00:05:46 It plays to Alphabet's strength. So I think it's a good move for them. But if I'm Alphabet, I'm not sure I'm cheering the demise of OpenAI to the benefit of Anthropic. even the 14 yeah i mean i mean that part if i'm actually the product manager trying to roll out gemini i'm not carrying that got it yeah because they're they're a very real competitor seem to do a lot of the things that gemini does not do well it it seems to me that just following this space i don't i don't have many specific investments that are just ai but alphabet's one that i own just because it seems like the only kind of no-brainer. No matter what happens,

Starting point is 00:06:27 they're going to be around in one way, shape, or form. They will. The one note on that, though, is that part of it is backfilling what they could be losing. It's not necessarily just organic growth for them. If search does decline due to AI, their AI can backfill that, but it's not just the unbridled growth that it would be for some of these other companies. Well, a lot that we are going to definitely be covering over the next few months and years likely on Motley Fool Money. Next, we're going to get to where we may be using products like Claude, the new foldable iPhone. You're listening to Motley Fool Money. New from Nespresso, blend wellness into

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Starting point is 00:07:35 Welcome back to Motley Fool Money with the Hidden Gems team. We got news this week that it seems like we're going to likely get a new foldable iPhone as early as September, Rachel. This has been kind of rumored for years. we have other foldable phones out there. Is this notable or is this just going to be another one of those kind of, eh, it's cool. You can make a VR headset. It's cool. You can do all these other things, but it's still not going to be a core product for them or am I overthinking this? I mean, you're right. We've been hearing rumors about this for years. It seems like they're

Starting point is 00:08:05 hitting a bit of a fever pitch. I think it's far too soon to say how much of a needle mover this will be for Apple. I think a lot of us are thinking, okay, do we need this? For most of us, our phones are already great. Folding a screen in half can feel a bit like a flashy solution to a problem no one has. But if you think about why Apple would be doing this, okay, so the smartphone market is maturing, obviously, the excitement over having maybe a slightly better camera on the latest generation of one's iPhone is wearing off. And so I do think there's this idea where Apple is saying, maybe we need something that's a bit more futuristic, gives people a reason to maybe drop $2,000 on a phone again. I mean, Apple is doing very well, right, from a financial perspective.

Starting point is 00:08:44 They have record services revenue, massive cash pile. They're very profitable. But the hardware growth has been a bit flat. And of course, that's the core of their business, even though services are the fastest growing area. I think it's interesting. I mean, you think about markets like China, right? Foldable phones are sort of seen as a status symbol. And a lot of Apple's competitors broadly in Asia have been introducing their own versions of this. There was actually a survey that went around where about 40% of iPhone users that were surveyed in Asia were saying that a foldable could be the ultimate weapon to reclaim a top spot, that they might be interested in a folding model. So we'll see if this is something that actually moves the business. It might just be

Starting point is 00:09:26 a niche product that a few people buy. If Apple pulls it off, I think it proves that they can still really innovate. If it flops, I think it could be a very expensive distraction from their AI goals. So, I was trying to figure out if I think this is the best of Apple or the worst of Apple. And I think the answer is probably both. In one sense, you know, look, the Samsung version has gotten kind of mixed reviews. The reports say that that is exactly what Apple was targeting here to kind of the areas where Samsung has fallen short, durability, the screen kind of creases or whatever. So, in a sense, this could be a classic case of Apple not being first, but being best, refining and winning. If this is today's version of the next big thing,

Starting point is 00:10:10 maybe we should just give up on the Steve Jobs turtleneck version of Apple. In a way, maybe, Steve, you've conditioned us. We're going to get to the point soon where people don't remember that reference. Well, right. Maybe. But I do feel like with Apple, there is still this weird expectation of, oh, just wait for it. They're cooking up something. And you know what? I think all of the evidence suggests that those days are over. If they were cooking up something, we would know it by now. We'll see. Travis, we've talked about it. Whether or not anybody wants an AI pin on their lapel, we'll see. But look, this is both a very good company doing things they should do. The $2,000 plus sales price, assuming people will

Starting point is 00:10:56 pay for it as a nice revenue boost, so it is incremental gains. But I think just the mindset, all of us olds that are used to the guy in the turtleneck saying one more thing, those days are over and we need to value this as a mature company that just continues to create incremental value off of their core products. Yeah. The one thing that I think is interesting with this product in particular is, is Rachel right? This is really just a China product. And if you read the book, Apple in China, one of the things that I took away from that was that Apple was such an iPhones were such a status symbol. It was not, hey, this is the most productive use of my money. It was just, look, I have an iPhone and you would spend a insane amount of your annual earnings to buy that iPhone.

Starting point is 00:11:45 So the cultural differences between China and devices in the U.S. and devices, I think, is not something that we necessarily fully understand as U.S. investors. But that seems to be when they make some of these changes and come up with something that looks a little bit different. It spikes in China because there is still that Apple cachet. So maybe that is the answer, is that it's just something that's kind of made for China. But I keep going back to, is the iPhone just too perfect of a product? Is there just no better answer than here's this flat piece of glass that's a computer that can fit in your pocket, and we're just not going to get anything better? Maybe that's the simple answer. I mean, honestly, the answer is the Google Pixel.

Starting point is 00:12:27 I beg to differ, Lou. All right. We'll have to have our iOS-Android battle in a future show. When we come back, we are going to get Lou's thoughts on the latest from Delta. You're listening to Motley Fool Money. when you're a mid-sized business you need every competitive advantage you can get like an ai solution that works for you not against you sap grow is built with ai embedded at its core working across every system and it's ready to go from day one so you can hit the ground running

Starting point is 00:12:56 bring it with sap grow ai cloud erp for any size business welcome back to motley fool money with the hidden gems team delta reported earnings this morning lou what did we learn so i don't want to bore everybody with all of the numbers and like just kind of because look honestly they sort of pre-announced this two weeks ago that's how the airline industry works where everything that they announced today was basically what what they said they would do great quarter though and things are holding up much more interested in what they're seeing into the future so far so good right that's I think. The airline said its corporate client survey, 85% expect to maintain or increase their travel spend in the second quarter. Low teens revenue growth, that's, you know, we're expecting

Starting point is 00:13:45 10% or so. Delta, I marvel here. And, you know, yeah, I mean, they're finally, the debt is down below COVID levels. We like to see that. And again, they gave us exactly what we wanted. But you marvel here is I don't think we fully appreciate what Delta did to save this industry. In 2008, they were the first ones to do a bankruptcy, to buy a competitor, kind of take out Travis's hometown airline. But they rethought, how can we both beat the discounters and still gain margin and gain advantages? Every legacy has followed that. And this is why we're in a better place today. One note, my favorite note in this quarter, Travis, people have made fun for a decade of Delta buying an oil refinery in Philadelphia. That refinery was a $300 million

Starting point is 00:14:34 incremental profit boost in the quarter. Also, having that there in Philadelphia, and the reason they bought it wasn't because they wanted to speculate on oil, it was because they were worried about whether or not jet fuel would be available in New York. That refinery is the reason why that over in Europe, they were canceling flights. In the U.S., the flights just got more expensive. Look, I'm still not going to buy Delta stock. I don't like buying airline stocks. But this company, maybe with United as its only rival, is just so well-run and sees things so well. And this quarter, this is why they are the best. I agree. I think it's probably one of the most well-run, if not the most well-run, of the airline companies. A few things stuck out to me,

Starting point is 00:15:19 in addition to what Lou said. They were unprofitable under GAAP, but they reported an adjusted profit that grew by more than 40%. Another interesting piece of this, revenue from premium seats, corporate travel, loyalty programs makes up more than 60% of the top line at this point. Premium revenue was up 14% in the quarter. Main cabin revenue actually increased for the first time since late 2024. So that was another element that I think kind of surprised me, even though the most significant growth that we're seeing is in those premium areas. As Lou noted, they're doing a good job of cleaning up the balance sheet. CEO Ed Bastian said that Delta is going to meaningfully reduce their capacity growth plans in the near term as fuel costs soar.

Starting point is 00:16:04 It isn't clear, though, if or when customers will pull back. Certainly, of course, in these results we're seeing now, there is a very, very robust tailwind carrying them into this next quarter of growth. So overall, I think a good start to the reports from the airlines for this earnings season. Yeah, we keep looking for canaries in the coal mine that the economy is getting weaker and they just never seem to show up. So we'll keep looking. But with the market where it is, we're bouncing back today, early on Wednesday, maybe one of the best days that we've ever had in the stock market, at least on certain metrics. But the economic weakness that I think would show up in a of those airlines first has not shown up yet. So we'll see what happens, especially with oil

Starting point is 00:16:46 prices in the future and how consumers are feeling. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Rachel Warren, and Dan Boyd of High in the Glass, I'm Travis William. Thanks for listening to Motley Fool Money.

Starting point is 00:17:16 We'll see you here tomorrow.

Motley Fool Hidden Gems Investing - Why Alphabet is the Winner from Anthropic’s Incredible Growth

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