The Anthropic IPO: Bizarre and Immensely Important

I’ve spent decades of my life packaging, offering, buying, selling and analyzing IPOs. I’ve never seen anything remotely similar to Anthropic. I’ve never before considered the success or failure of an Initial Public Offering (IPO) critical to the direction of the US economy. I’ve never seen a company that grew that fast to get that big, because neither has anyone else. But I’ve also never seen a mega-cap IPO where the company sells a product that has demonstrated such little pricing power, or one that has seen its meteoric growth so rapidly decelerate BEFORE the offering. I’ve also never seen an S-1 (SEC registration statement that all companies must file prior to an IPO) where there is so much complexity that trained analysts can’t agree on a number for basic metrics in the financial statements. Was the company profitable in the second quarter? That depends on whom you ask. How did the company do in the third quarter? They didn’t say.

The US economy is reliant on the continued growth of the AI infrastructure buildout. That buildout is largely reliant on just a few companies’ ability to keep raising equity and debt. Anthropic needs (by one estimate) $80B annually to finance the commitments they have made to secure computing power. If costs rise to attain that capital either via higher cost debt or more dilutive equity offerings, the sustainability of the AI buildout weakens. I know I’m not breaking new ground in economic thought here that the US economy is reliant on the capital markets remaining exuberant, but my point is that this company alone, along with this IPO is a linchpin to the whole thing. It is critical to the entire AI investment thesis, across that spectrum, that the business model of Anthropic is durably viable. If this financing goes badly, all future AI related financings get tougher. Psychology can change fast. The opposite is also true, if Anthropic flies off the shelves and remains buoyant, you will likely see a lot of companies raise capital in that wake.

Anthropic is a growth company, in fact, as I said earlier, it has grown revenue faster and higher than any other company in history. But then came the third quarter. This past summer we saw the rapid rise of high performance open-weight Chinese models gaining market share and driving down the price of tokens for everyone. Token pricing has now fallen about 90% with no clear bottom in sight. This past summer also brought an end to the concept of token maxing where enterprise employees were incentivized to use as much AI as possible regardless of whether anything productive came from it. Lastly, the summer has made it clear that we are in an era of AI experimentation. When an exciting new model is launched like the Anthropic’s Fable 5 in June (2q), engineers are quick to adopt and look for ways the new model can be additive or bring new efficiencies to workflows, but after a few weeks, demand tails off and migrates to a newer model. Unfortunately for Anthropic, that new model may be an open weight version/imitation unnervingly similar to what Anthropic just a month ago launched but at significantly lower prices. We have essentially learned that the moats are shallow and the honeymoon periods for new models are shorter and shorter. We don’t yet know yet how exactly much growth slowed but no one seems to question that a very significant deceleration has occurred.

While talk of a $2 Trillion valuation has migrated down to talk of a $1.5T valuation, we are still talking about a double-digit multiple of now flatlining revenues. I’m sure bankers at Morgan Stanley and Goldman Sachs will put together eye-watering pro forma models that will assume the company resumes its exponential growth. That’s what they do. That, however, should not reassure anyone for a minute that they themselves believe those numbers. The Chinese wall between banking and research might be 10 feet thick, but that doesn’t mean both sides of that wall don’t understand how the game is played. That said, perhaps growth will resume and reaccelerate. This era of AI growth is a new, highly dynamic paradigm. It’s just that, it doesn’t usually go that way.

In the end, what you are buying is a story, one that may come true and one that may not. Neither I, nor the CEO of Anthropic, or Wall Street’s masters of the universe have any idea what this company will earn three or five years from now. But, fortunately for Anthropic, we live in a time where the more fantastical the story, the bigger the hype, the bigger the potential addressable market, the bigger the valuation. The Musk playbook to downplay the near-term to focus on the potential in ten years is, for now, a winning playbook. I offer no recommendation. The stock may rip higher post-IPO and it could collapse. Neither would surprise me. My only recommendation is that if you do get involved, have a predetermined process in place to manage risk.

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