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Anthropic’s $500 Billion Question

October 26, 20260 comments♥ 0
00:01It's Anthropic S-1 Day and Motley Fool Hidden Gems Investing starts now.Welcome to Motley-Fool-Hill Hidden Gems Investing.I'm joined today by Lou Whitman and Matt Frankel.Matt, we got some big news this morning.You broke this to me as I was driving my kids to school.The Anthropic S-1 is out.So I think we've been pouring over this for the last couple of hours.I'm just going to throw this to you.
00:29What did you think?Yeah, I mean, I've been waiting for this one for a while.I don't know about you.Not that I'm necessarily going to buy the whole market, yes, has been waiting for this one for a while.Yeah, I mean, not that I'm necessarily going to buy the stock, but this is honestly the most impressivebusiness I've seen filed to go public at the time of its S-1.We don't have the price yet.We don't know anything from an investment standpoint if it would make sense to buy the shares or anything
00:53like that.But just as far as the business goes, I mean, we, yeah, we had a few leaks about a week ago, right?The headline revenue number leaked, the $80.7 billion loss leaked to the Wall Street Journallast week.But we did get a lot of new things.So just to kind of name a few that I was really focused on.Number one, that loss is really misleading.It was a one-time charge relating to its convertible notes because those are more
01:22valuable now.So it's an accounting charge, not an actual loss.Yeah.Can we just explain that for just a second?So when these private companies are raising funds, they typically,do it through what's called safes or convertible debt. So technically it is debt that is on theirbalance sheet, even though it is a venture capital investment. And it's intended to turn intoequity eventually in the future. It just sort of protects the VCs downside. And so that when
01:46these charges are related to that becoming equity, I'm not an accountant. But like you said,this is a non-cash chart. So basically nothing to be worried about at all. Yeah. Well, so let's say thatJust to name a couple numbers, you issue convertible notes that are convertible into common stockat a value of $100 per share.Your stock jumps to $500 per share.All of the sudden, those convertible notes are five times more valuable, and you need toaccount for that on your balance sheet, even though it's not an actual loss, you're not spendingany money.
02:19It's just to show that, honestly, it's a good reason for a loss.Your company's done well.Yep.After that accounting charge, the company's actually pretty close to break even.even on a non-adjusted basis,you know, an operating income wasnegative $693 million.That was about 4% of its total revenue.
02:40That's not a bad loss for a companythat's growing as fast as this.So that's really one of the big headlines I've seen.Yeah, Lou, it did seem like there was a lot of positives.We talk about these companies burning tons of cash.And I thought it was interesting that they have a ton of cashon the balance sheet,over $100 billion in cash on the balance sheet.
02:58And they're not really burning all that much of it, at least at this point.They're a lot closer to break, even than I think the narrative would suggest, which is a real good news.And look, they better be because, again, a lot of the stuff we knew, they have so many IOUs out there.And I mean, if there's one, I don't know, yellow flag, but about 20% of Anthropics total revenue in the first half came from just two customers.20% isn't terrible.I have investments that are probably that, you know, it might be even more than that.But we, Travis, we've talked to this elsewhere, just kind of the how narrow is this and how broad this is.We can get into valuation, but the valuation talk assumes a much broader market.
03:38I agree with Matt.It's an impressive business.Whether it's an impressive stock, though, I think kind of, you know, that's in the details that maybe we don't quite know yet.Yeah.Speaking of details that we don't know yet, there is nearly $500 billion, Lou, in obligations for future spending.They gave some details.Some of that is going to GCP, Google Alphabet, some Amazon, some Microsoft, and then SpaceX.Those are, I think, the four that were specifically called out with 100, most of those are
04:09$100 plus billion obligations apiece.What we don't know is the timeframe of those, because that table was left blank.What spending is an obligation in 2026?What's 2023?because some of these contracts go out to all the way to 2036.So how do you think about that with the context of the other confirmation that we got is thatthat third quarter growth number was about that 45% number that was reporteda major slowdown in quarter over quarter growth from Q1 to Q2.
04:42Now, most companies would love to grow 45% quarter over quarter.But it's at least something that investors need to think about, not only if you're inlooking at Anthropics, IPO, but also all of these other counterparties.They need to have a lot of growth to be able to reach these obligations that, by the way,they have to take or pay.Kind of.And that's for the lawyers to decide, right?But yes.
05:05Yeah.And the thing about dealing with doing business with Google, Amazon, all these companies,is they have good lawyers too.So, yeah.Look, it's so dangerous to extrapolate growth rates from the past.It's also dangerous to extrapolate a one-quarter slowdown as this.is definite true. The answer is we don't know. And the other thing is, is that as far as if you'relooking at Anthropic right now, one of the reasons to get the IPO out the door is, is that
05:32is just another lever in which to raise money to meet these obligations. I think the gloom and doom,the dangerous scenario is that it just falls off a cliff. Is this that it's not as good as wethought it was and for some reason it falls off? If it doesn't grow, I still think they can handlethis spending. It's just, it's just like, again, valuation, profitability, all of that.I think they're in a decent shape to manage a lumpy growth trajectory, but yes, we are still assuming alot of growth. Yeah, so two quick points. Just $131 billion of cash on the balance sheet,not including what they're about to raise in their IPO, which could be pretty massive. And number two,the economics are actually very favorable. When I see their, you know, $500 billion of compute
06:20agreements, they were spending $2 a year ago for every dollar in revenue they generated.They were spending $2 on compute.This first half of 2026, they're spending $0.55 for every dollar of revenue they're generating.The economics are moving in the right direction.So as long as they can afford to meet these obligations and their business continues toscale, the economics are going to get even better.Okay, but Matt, here's the pushback.I was thinking about this this morning.
06:51Why IPO now?Because you mentioned it.They've got plenty of cash on the balance sheet.The business itself doesn't seem like it needs cash.Is there a reason to rush this in 2026?Is this just market conditions?Something we're hearing from a lot of different companies.A lot of IPOs are not happening because of quote unquote, market conditions.
07:13What do you think about that?Because as public stock investors, we are exit liquidity for,somebody, so you always have to think about why they're selling.Well, for one thing, yes, they have enough cash to fund their growth now.That $500 billion in computer agreements, I don't by any means think that's going to beall of it.So they could have other contracts.They're anticipating a ramp up in spending, which if your business is growing 1,400%
07:41revenue-wise year-over-year, you're going to have to spend more.So as we kind of mentioned earlier, it's just another funding.mechanism that they don't right now they have the private markets. So it'll be, you know,another way to raise money. And I wouldn't be shocked if they raised $100 billion in this IPO.Yeah, you never want to go public when you have to. You want to go public when you want to.They don't need to tap levers. They don't need to tap. But the point is, is that they're availableto tap them. I think you look at that. Yeah, there's actually, Travis, I think the traditional,you know, like, oh, we're just the bagholders for all the employees that want to get out.
08:20There are so many secondary markets around this private stock.I think that's actually less of a need now than it was.I mean, we learned management sold, what, like $5 billion worth of stock in one of their rounds?There is a lot of liquidity here relative to a normal IPO.I get the concerns and I get the idea of that, yes, they're people who are looking to sell.But I think those concerns, while always true in an IPO are actually less so here,given all of the options they have.Definitely going to be an exciting IPO
08:49and one that I'm looking to fill in some of those blanksthat were left on the S-1.When we come back, we're going to talk aboutmeta potentially raising another $100 billion.More on that in a moment.Welcome back to the show.The other company that's spending a lot of moneyon artificial intelligence is meta-platforms.
09:10Lou, we recently, it is now reported, I guess,that they are going to be raising about $95 billionin stock.offerings, this is something that investors are going to have to think about because Zuckerbergreportedly is not going to be losing any of his voting power in the company, but they need a lot ofcash to be able to live out his AI vision.Yeah, these are the Zuckbucks that we heard about last week, this new class of shares withno voting power.
09:38I don't want to be too cynical because a lot of, I mean, Google does this.A lot of companies have done this or forms of this, so it's kind of a way to do it.But yes, they are, I think what, it's $30 billion plus $65 in convertibles or something like that, where they are going to raise.And here's my, like, I mean, we can get into the details of this, but the big picture thing is for all the panic of the last few weeks about where's the money going to come from, here's a reminder that there's a lot of ways to raise money.The hyperscalers still are well within their power.We're not, I mean, we may be heading for a cliff.We may not be.I'm not here to predict the future, but right now we are not at that cliff.
10:16The takeaway is they needed money.They're able to raise money.The music continues.The other piece of this, Matt, is that over the weekend, Elon Musk said that these,the hypersal scalers are the companies that have another business are going to be fine.They're going to be able to fund their obligations, this AI spending.But we have seen the capital markets start to close to some of the other companies.The Neo Clouds is what he was referring to.
10:40And I think he lumped in some 200 companies or so.A handful of those are publicly traded.But we've seen a bunch of those stocks decline.We've seen their yields rise.Now meta is coming out and saying, hey, we're going to need more money.Anthropic is going to be public.It does seem like the market is going to be tapped in a lot of different ways.And not everyone is going to come out from a position of strength.
11:04Yeah.And I mean, with meta and the hyperscalers, I'm not worried that meta is raising $95 billion.I'd be worried if they were unable to raise $95 billion, which is really what's happeningwith the neoclouds right now.You know, Corweave is what, it's a business that I really want to like.I think the neocloud's really server role.And one, take what Elon said with a grain of salt.There is competition.
11:26Yeah, SpaceX is effectively the biggest neocloud out there.Right.So there has competition.So take it with a grain of salt.But, I mean, Corweave does have $52 billion of debt.It's hemorrhaging money.They raised more than $35 billion this year.And really, the banks closed.
11:42there seems to be a lot less appetite for AI funding without actual operating cash flow to back it up.And with some of the hyperscalers, they have that.I mean, no one's going to question Google's credit rating right now.But when it comes to the neoclouds, it's not surprising that some of the questions,like we just asked for the Anthropic, which is a much stronger financial company,where are they getting the money to fulfill all their obligations?and it's a real question with these neoclouds.I'm curious.
12:14I would actually love for Corweave to go to markets now with a debt offering just to see if it is closed or just how expensive it is.It's dangerous to read the secondary market.There's definitely directional knowledge to be gained in the secondary markets for debt,but I don't know if it's closed.It's definitely less open.I think it is worth noting too, though.I mean, Elon definitely, I think diversification helps, period, and I think he's right there.it's also self-serving.
12:40And some of his statements, I think, supports the neoclouds.And because they are, SpaceX is consciously making short-term deals on their compute power.They are doing that because they are saying, we think the cost of compute will only go up from here.Now, mind you, Amazon is sort of taking the opposite side of that bet.So, I mean, that is not a settled debate.But if the cost of compute is really going to continue higher to the extent that it's,It's not wise to sign long-term contracts.That supports higher earnings over time for the neoclouds,
13:15which can support more fundraising through debt, I think.So I think it's, yes, there are going to be winners and losers.Diversification helps.All of this is true.Right now, I would not want to go out today and try and raise money.I'm not convinced the core we've couldn't come to market a month from now and raise money.So we'll see.We'll see.
13:38Yeah, for perspective, the debt that Lou is talking about issued at about a 9% yieldand currently trading for about a 15% yield.That's what we talk about when we say tech markets are closing.It means they're demanding more yield that makes the business a little bit iffy or that financing costs.When we come back, we're going to get to the big earnings report for the day.That's coming from Verizon.More on that in a second.Welcome back to the show.
14:05It is a huge earnings week.We're going to be covering that more throughout the week.But for today, we're going to be covering that more throughout the week.But for today, we get Verizon, Matt.I looked at the numbers this morning.They look pretty solid.And still, the stock's down about 2.2% today alone over the past week or over the pastmonth down about 6.5%.
14:23A lot of that is because people are worried that Starlink is going to be coming to market.What did you think from the numbers?Yes.I mean, the numbers look great.I mean, Verizon, just to name a few of the kind of, you know, below the headline numbers,postpaid phones, net additions, were over $400,000.That's the best in five years for a Q3, added 137,000 net accounts.So that's after accounting for churn and things like that.
14:48That's the best in more than a decade.So people are still adding subscriptions to Verizon.Guidance went up for the third quarter in a row.But yeah, you hit the now on the head when you said that the stock is already down 6% over the last month.And it's really this kind of SpaceX overhang.And Verizon CEO, Dan Shulman, had some pretty aggressive.things to say about it.Yeah, Lou, this is one of those that now, it's always been a dividend play, but now we're
15:19at a 6.5% dividend yield.I came away looking at it going to increase guidance in almost every way they possiblycould.What more do you want from Verizon at this point?Yeah, it's the, it's the boogeyman way down the road that might eat into this.But look, there's plenty of competition here right now.That's why it's not a growth story.I don't think SpaceX coming in eventually and emphasis on eventually.
15:45I don't think that it really destroys the business because, again, no one has priceand power.It's just like we already saw what this industry looks like with four players and it was uglyenough that we went to three.But anyway, you know, that's what it is.I think Showman is overstating the SpaceX Cappex story.So I do think some of it's talking, self-serving.I'd also note that if SpaceX is coming, what will they?
16:10that mean for Verizon AT&T and T-Mobile's CAPEX from here because I do think they do need to answersome of those questions for what Starlink can add along with Starlink having to invest as well.But yeah, I think this business, it's an uninspiring gross stock.It's a pretty attractive value stock and most of the SpaceX stuff is noise, at least for thenext few years.Yeah, the challenge as someone who has owned Verizon stock in the past, that yield looks great,But you don't get a lot of appreciation.If that's all you get and the market goes up 10%, you still lose.
16:44Yeah.Yeah.It's a challenging, challenging business.But it also doesn't seem like it's going anywhere and positive to see that things are getting better.As always, people in the program may have interest in the stocks they talk about and theMotley Fool may have four more recommendations for or against.So don't buy our sell stocks based solely on what you hear.All personal finance content follows the Motley Fool's editorial standards.
17:04It 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. For Lou Whiteman,Matt Frankel, and Dan Boyd behind the glass. I'm Travis William. Thanks for listening. We'll see youhere tomorrow.