The $800 Billion Catch Behind Anthropic's IPO

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We talk all about the incredible restaurants he's worked in, the best music to play in the restaurant bathrooms, and how he reacted when he found out his restaurant Cabava had been ranked number one by the New York Times. New episodes of Happy Hour are available every Wednesday. You can watch on YouTube or listen wherever you get your podcasts. Cheers! Hey everybody, Sue Bird here. Back with another brand new episode of Birds Eye View this week, joining me on the pod is Cara Lawson, Head Coach of Duke University, Women's Basketball, and Team USA. Cara and I break down how the 2026 WMEA Finals are unfolding. We revisit Team USA's path to World Cup gold and discuss how far the women's game has come. Plus, Cara reveals her favorite player that she ever coached. Check out Birds Eye View on YouTube and wherever you get your podcasts. If money is evil, then that building is hell. Show those up! Welcome to Profty Markets, I'm Ed Elson, it is October 27th. Let's check in on yesterday's market vitals. The major indices climbed as tech stocks got a boost from Anthropics, S1, more on that in a second. The yield on tenure treasuries was flat ahead of the Federal Reserve's interest rate meeting. On Calche, the odds their hold rate steady are at 92%. Brent Crude was volatile, peaking above $117 per barrel. As President Trump said, he was deciding whether to make a deal with Iran or "finish it off". And finally, Brazilian markets sold off after incumbent President Lula won re-election. Brazil's benchmark index, the Ibo Vespa, crashed as much as 17%, and its currency saw its sharpest drop in more than two decades. OK, what else is happening? One of the most anticipated S1s of all time has officially arrived, Anthropic has filed to go public, and we finally got to see the books. In the first six months of the year, Anthropic brought in $16.3 billion in revenue. That is up from $1.2 billion in the same period last year. It reported a loss of more than $80 billion over those six months. However, $72 billion of that loss is a non-cash charge tied to its convertible notes and other fundraising instruments. Its operating loss, which is more important here, came to around $700 million. That is down from $2.1 billion a year ago. While the filing answered many questions about Anthropic's business, it also left out some crucial details. For example, the company did not disclose the total sum of its contractual compute obligations. It also didn't reveal who its biggest customers are, it didn't break out training costs either, and it didn't say when Anthropic will actually be listed. So lots to get into here. We are breaking this down with Paul Kodroski, managing partner at SK Ventures. Paul, great to have you on the show. Lots to get into here. I'm going to start with an open-ended question, which is, what did you make of this S1? It's finally here. I felt like it was like an MCU, like a Marvel movie, and I'd seen the trailer too many times. And so I'm like, oh, God, there's nothing left. It's all been spoiled. So an awful lot of what was in this was pre-leaked, right? So some of it was obviously in a series of Reuters reports, business insiders, it's been all over the place. And so I guess the surprising thing for me, for the most part, was how few surprises there were, that for the most part, the major nuggets in terms of customer concentration, the deceleration and revenue this quarter, which was a little bit massed actually in the filing itself, but you nevertheless, you can kind of back it out. Those kinds of things that all been sort of pre-leaked, as they say, was like I've seen the trailer, and it was too long. So that sort of stuff was there. The other things like customer concentration, I had expected a little bit more data on that. This year, I think there are two largest customers where something like, from the disclosure table, I think it was 25%. And this year, they kind of masked out a lot of the names and says, showed that their largest customer was sitting at a round. I think it was 11 or 12% and then everyone else is kind of masked out, so you don't really know where it stands. So all we can assume is that customer concentration, it may be that there's 10 companies that are 25%. We just don't know anymore because they're only showing people over 10% share. I think the big question that we were sort of speculating about is, how unprofitable will they be? And will they pursue some sort of accounting gymnastics to mask their lack of profitability? And I think that that is an open question, and we will get into that. But from the outset, when we look at the operating losses, and just to clarify for people, that net loss of $72 billion that is related to the conversion, that is genuinely not relevant because basically what that is accounting for is the fact that they now need to pay back investors because their enterprise value has gotten so large. So actually, the fact that that net loss is so big reflects the fact that their valuation has gotten so high. So that's not the thing to focus on. The thing to focus on is the operating loss of nearly $700 million, which I thought was low, or at least narrow compared to the six months compared to last year, where it was more than $2 billion. That to me was a pretty good sign. I have some pushback to why that might be a good thing that we can get into. But your reactions just to that number, $693 million in operating losses in the first half of this year, was narrower than I expected as well. So again, it's hard to know, I mean, having been on the other side of this, not to be completely cynical. There's a lot of work goes on in terms of preparing a company's cost for an IPO. So the thing that they wanted to show, probably show their best face on, was what that operating number looked like. And so that's not particularly surprising that I guess that it was a little better than expected. But nevertheless, like full credit to them that I think this is nowhere near profitable and it's probably going to get worse in future because for a bunch of reasons we can talk about. But the number they presented there was, I think I was thinking we'd probably see a number around 1.1 billion on that order of things. And so we're about 400 million shy in a good way of that number for all kinds of reasons they can control. So it's not necessarily something that isn't written as laws of physics that it has to stay at these levels. But nevertheless, it's slightly narrower than expected. There were other things that I thought were interesting that they did that are, they're not nefarious. There's just things you need to keep an eye on. Like non-catch things like adding back stock based compensation. That was a material item in there. Andthropic is very, how shall I say, generous in terms of stock based compensation. And that will probably continue post-IPOs with something that investors will have to keep an eye on because that's dilute, obviously. And as a public company, one of the things that the consequences of having such high stock based compensation is that you have to buy back a lot of stock to avoid dilution of your institutional and all investors, but institutional investors in particular. So that item actually is consequential going forward because in terms of your sources and uses of cash, it's not all going to be going out the door again for funding compute commitments. You obviously have this very large number that they're going to be having to deal with in future in terms of trying to continue to protect investors, if you will, from future dilution, given how aggressive they are in terms of stock based compensation. Credit to them for not giving us a completely bullshit non-gap adjustment, where I remember you and I speculating, are they going to strip out the training costs? Are they going to say, "Oh, don't worry about what we have to do in terms of training these things." They didn't do that. They didn't break it out cleanly, but they didn't try to do something non-gap in terms of hiding it. That's exactly right. Yes. They didn't try to say, "Don't worry. It doesn't exist. It doesn't matter." But, so I was looking for, "Okay, well, maybe this is going to work. Maybe compute costs are actually like there are on a path to profitability, which seems plausible and to be honest, imminent, given what we saw." But then I go through the document, I want to get your reactions to what I make of this, and I get to the liquidity and capital resources section. This is like page 161, it's way further down. They go through some of their future compute agreements. They show us that they have an agreement with Broadcom with $161 billion, and Google $115 billion, and you add it all up, and you really They are about to spend on a timeline that they don't tell you, but they're about to spend more than $800 billion on compute. And none of that is included in the income statement. And so I'm looking at the income statement now and I'm thinking, does this actually tell me anything? Because it seems as though they've left all of their compute costs at the bottom as a footnote, not because they're trying to pull a fast one. I don't think, but because those costs haven't actually been reflected in their income statement yet because they're about to happen. So what do you make of that pop? I think that's exactly right. And this is a deep structural problem that I think Moody's pointed to a few weeks ago in terms of the way that all of these compute commitments trickle back to and are consolidated in the financial statements. Because, well, they're not in cash obviously now because they're future commitments, but they don't even show up necessarily in the form of orthodox debt because these are future commitments that are actually debt instruments. They're more like a lease that's being discounted back to the present value today. And they're all obviously highly consequential and investors would need to think about it as you consider what the actual cash flow nature of the business looks like going forward. Because, in particular, it's not just the size of the commitments, they're all non-cancellable, right? This is really important. This is not something where I say, you know why it's not working out the way we wanted. We're not going to have that commitment. Now, these are all non-cancellable capital commitments with the only exception being that there's a growing capital commitment in terms of doing compute at SpaceX, which I think works out to about $3 billion a year. So much smaller in the great scheme of things than these other non-cancellable compute commitments. And that, I think, is cancelable on a 90-day basis, 90-day notice, which speaks more to what SpaceX is trying to do, I think, than anything else. That they're desperate to have this cash flow coming back in because they, in turn, consolidate it as growing AI revenues when it's really not. Obviously, this is just compute, you're providing to someone else on a rental basis. So it's important, I think, to remember that the preponderance of the commitments are in future, they're massive and they're not all non-cancellable. I even if you were to get rid of SpaceX, you're close to $700 billion in compute spending. It's immaterial in terms of the great scheme of things. And I think that's, by far, the most important factor here, that they're looking at, and in turn, those compute commitments are even more important because, in a sense, you're working through distributors, and they say that's in the S1 itself. And so they're distributing their large language models through competitors, right? Microsoft, one of the prime examples Google and so Amazon, and this is a really unusual relationship because you're distributing through companies who also sell on your behalf, but also take a rake off the top as they do it. So my analogy is, this is a little like as if Spotify, which has a rake from the music companies that are about 30% of their revenues, but instead of it being 30% of revenues, it was a fixed percentage. It doesn't matter how much you sell. Not only that, all of your competitors also have music streaming services, and they're perfectly happy to kick you out. So this is the deep fragility in the nature of the distribution business, and I use the Spotify example because it shows you how a company that's been penalized for this kind of relationship is actually in a much more favorable position than entropic is. So this brings us to what I think is the most illuminating part of the filing, which is that we learned, and a lot of people said, oh my gosh, this is so great that anthropic is not spending on capex, which is obviously been a huge expenditure for the hyperscalers, i.e. building their own compute, building their own data centers, and everyone said, look, this works because they don't have this capex issue. But they admit to the problem that you're describing, which is that they are leasing compute from their competitors, primarily, which is probably going to be an issue later down the line. And so I'd like to just quote, read you this quote from the s one, our increasing efforts to build out our compute and infrastructure require substantial capital expenditures and are changing the cash flow profile of our business. Whereas the compute purchase through our CSP agreements is generally paid as the compute becomes available to us, we expect an increasing portion of our compute and infrastructure investment to take the form of capital expenditures and other commitments, including lease obligations that require significant upfront payments well in advance of the related compute becoming operational. That tells me they're about to build data centers and they're about to spend a shit town on them. Is that right? Right. That's exactly a shit, a shit ton being the technical term here. So this is also a fancy way of saying or maybe a relatively opaque way of saying the what you see in the past in terms of the structure of the business will be representative of what it looks like in the future, that we can't maintain these lease hold these lease relationships with our competitors in terms of passing product through. So we're going to be forced to make duplicate capital investments so that we're not beholden to them both in terms of strategically, but also in terms of this rake off the top in terms of what we have to give up from what's called marketplace sales where we're actually selling products through the market places on these other services. And so that's what you're saying the nature of what we spend in future not only is going to continue, but it's going to accelerate in terms of the cap X because we're in the strategic quandary of being reliant on our largest competitors. Which tells me that the income statement is actually irrelevant, right? I mean, if that's not even close to a reflection of what this business is about to look like, why does it matter? Yeah, and I think that's the thing that people are missing is that in a sense, we all know that income statements and financial statements in general are backwards looking documents, but this is backwards looking at a particularly sharp inflection. And the sharp inflection is from a business that was largely relying on distributors to a business that's increasingly going to be trying to go direct. This is the transition that's underway and in going direct, it has two consequences. One is massive current cap X for doing that. And second, and this is the thing people miss all the time and kudos to Michael Burry and others are pointing this out is that it creates maintenance cap X. You don't have to spend it just once. You have to maintain these things. And so you have a future capital obligation that's not just the amount you spend to build, but also the amount you have to spend to maintain these very expensive facilities. But they're in this obviously in choice. They have no choice but to do that because otherwise is to be reliant on their largest competitors who could, you know, like Microsoft did back in its heyday, you know, cut off their air supply at any moment. So here's a little conspiracy theory that I'd like to see a few thing is perhaps correct. Is it possible that this is why they wanted to go public now? Is it possible that they wanted to take this one moment in time where the operational, the operating profitability looks pretty good right before it's about to look quite bad? Because that seems like that is what is about to happen there at this inflection point. No, no, no, no, listen, I was arguing that earlier today multiple times with people. So I think that's exactly what's going on. This is as good as it looks from the standpoint of the business as currently structured. And now you go through this inflection that makes it much more capex intensive. So you're essentially changing jockeys and changing the underlying structure of what's happening. And so I think this was probably there. And they know this is the best time to do it because the future business is going to be very different. They're essentially re duplicating AWS Amazon web services in both directions building up and building down in terms of both the client customer facing as well as the cloud facing stuff. It doesn't mean it's impossible. It could work, but it does mean that the bit with the way the business is characterized in this current statement is not representative of the future. So what would what would it working look like in your view? Well, I think what have to look like you'd see, for example, one of the statistics they want to they want to tout in the document is the declining compute intensity of token production that it's been coming down something like it's falling like 50% or something like that. And so you want to they what the business would have to look like collapsing cost in terms of compute intensity of the underlying business. And that's the only way that the margins are supported and could work. Because otherwise you just simply are going to eat the business on the basis of the compute cost associated with it. So that has to continue to decline. The more troubling piece is that there is a there's a revenue deceleration underway if you look at the leaked to three numbers in the context of everything else. They're now looking at something like 50% revenue growth, but arguing getting Q4, they'll see a spike. It's implied, but back to about 64% or so. So you that has to you have to see that reversal in the fortunes of the business. One is declining compute intensity. One is a re acceleration of growth and that I'm saying a company coming like this to market needs already to re accelerate growth just blows the top of my head up. Final question. This is said to go public. The report evaluation is going to be $2 trillion. There has been some debate as to whether that will actually materialize. Yeah, one five or so. I keep hearing him. Yeah. What do you think will happen here? Do you think this goes out at $2 trillion? $1.5 trillion? Does it go out at all? What do you think? I think if it goes, it goes at $1.5 or so, but I reserve the right. And this is my long standing claim as the US won't have a functioning government for the balance of the year. So who knows what will actually be able to come public in one world and what won? It's not very helpful, Paul. It's not my fault that we don't have a functioning government blame politicians, but nevertheless $1.5 assuming we have a functioning government zero if it doesn't. Paul Goodrowski is managing partner at SK Ventures. Paul always appreciate your time. Thank you. Yeah, thank you. After the break, a chill in the markets. And for even more markets insights, you can subscribe to my weekly newsletter. Simply put at EdwardLson.Substack.com. Support for the show comes from Sophie. Here's the thing, most traditional banks pay almost nothing in interest, so your money ends up just sitting there, dwindling at sums, doing nothing, and if your money is doing nothing, it's not doing its job. You work hard for every dollar, so why not put those dollars to work for you? That's where its so-fi comes in. With the everything app for smarter money, with so-fi checking and savings, you can easily track your spending and save towards your goals while learning nine times a national average savings rate. 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Tune in every Monday for late night sister talk meets boardroom strategy. Check out Tiger Sisters on YouTube, Spotify, or wherever you get your podcasts. Welcome to the Tiger FAM. We're back with ProvG Markets. Markets are beginning to feel a chill in the air. The Nasdaq 100 fell nearly 3% on Thursday, its worst day since June, as worries about how big tech will pay for the AI build-out hit tech stocks. The same fear showed up in the corporate bond market. Corporate bond yield premiums surged to their widest levels since May 2025, meanwhile investors moved back into treasuries, pushing the 10-year yield below 5% for the first time in a month. Stocks did rise yesterday, but the S&P and the Nasdaq are coming off of two weeks of losses with big tech earnings and a Fed meeting still ahead this week. So the question for investors is winter coming for the markets. Joining us to discuss this was speaking with Robert Armstrong, US financial commentator for Financial Times and author of the un-hedged newsletter. Rob, good to see you, e-robes, that last week's quote, "Epic Treasury Rally" and the accompanying route in tech stocks had the feeling of a turning point, the sudden arrival of winter after a long summer. Every general question that you posed in your piece is winter coming for stocks. I think it's really important that the 10-year and the 30-year yield went up last week when stock markets were faltering. Because if you remember, it was hardly a week ago when all bad things were being done by treasuries and treasuries were trash. The US physical system is unsustainable, inflation is out of control. These things are monstrous. They only go down. With that as the context, things got spooky enough in equities that people started buying the crap out of treasuries anyway. We had like a 19 basis point day on the 10-year last week. I can't remember the last 19 basis point day when the yields went down that much. People were really buying this stuff. By the way, the bad feelings about the bond market may have been overdone. When you can get, in real terms, in inflation-adjusted terms, you're talking about 2-3% from the bond market, I'd say that's pretty good. It's not like there was an irrational rush into bonds, but this fast change of mood, I think I really told you something, and that's extremely striking. That's point number one, and I'm rattling on here, but I'll get it all out, and then you can respond. Point number two is that cracks had really been appearing in the equity markets for quite a while before this happened. As we've discussed on this show before, I believe, the NASDAQ and the S&P 500 have been heading in a herky jerky way sideways for six months, and since May. But below that, we have seen the market behaving in a way that is consistent with the end of a cycle and is consistent with higher bond yields putting pressure on them. We've seen things like one of the examples I pointed out last week was there was this group of industrial stocks, like GE Verona and Caterpillar was one of them in comfort systems. These were all the industrial stocks that sort of benefit from the AI boom. They put the cooling and electronic systems into, and the construction part of the data centers. Great. There was an unbelievable run. A lot of them doubled. Well, they've been doing like crap since May, right? The small cap stocks have been doing terrible. A lot of the interest sensitive parts of the S&P, utilities, real estate, those have been doing badly, so it was like more and more work was being done by the big tech stocks and last week, those started to crack. We saw the response in bond yields and it's like, okay, something is different is now. It's not all unicorns and rainbows and hard candy at this point, something feels different. So I'm not calling for a crash, but the euphoria is broken. There's a much more realistic, much more wary set of fundamental action, price action going on in the stock market now. And that remains true today, even though we had a pretty decent day today in markets, I would argue. It seems that the 10 year is really the crucial thing to look at. And just to be clear for everyone, beginning of the month, we were at 5.3%. And I'm going to take my little victory lap here, which is that on October 5, I said that this was the end of the sell off. And my prediction was we're going to see the yield come back down and we'll see bonds rally. That is what's happened. We're now down below 5%. Yeah. That is a huge move. Just for readers who don't follow the stock market, that's like a 15% move in the stock market would be a equivalent size. This is a shift. Yes. A huge shift. And I guess the question is, is why is that happening? And it's probably a combination of both things. It's probably that the bond sell off was overdone. And then at the same time, there is a legitimate concern around the equity markets, specifically around its reliance on AI. It seems that investors are beginning to get jittery. And so in that environment, why would you not lock in decent yields, move into the safer bond markets, which is kind of everything that you would expect from a market that is reacting to a boom and bust cycle? And so in a lot of ways, it almost seems like, yeah, this is what's supposed to happen. The boom happened and now investors do this. Yeah. No. It makes sense. And it's supposed to be that when when equities get jumpy, bonds do a little bit better. And they have. And that's really nice. More evidence for your claim that this is a flight, there's part of this is a flight to equity trade, which is the staple stocks would have been, which have been like the worst performing stocks in global markets in general in the US market. So I'm talking about the people who make paper towels and deodorant and tomato sauce, right? The real consumer basics tobacco, whatever, these, you know, this industry, especially in the United States, has been having its struggles just to grow. And so that's one reason it's been doing it. But nobody wants anything to do with these very safe, boring companies. Look at how those performed in the last week or two over the whole world. It's like the line just like leaps off the chart all of a sudden, right? So that's fear at work when you're starting like maybe I'll sell that a tech stock and buy Kimberly Clark. That's that's fear talking right there, you know, until Kimberly Clark pivots to data centers in some way, which I don't think is off the table. I think the perhaps the most jittery signal that we got last week, I think came from Elon Musk. He posted this, this tweet on X, which I'd like to read to you and get your reactions. He said, quote, as of the past few weeks, debt markets have almost entirely shut off access to the money for any company that doesn't have revenue independent of AI data centers. He continued, he said, that means 200 plus neocloud are going to see guppy level death and consolidation. Some will make it through, but not many. He seems to be saying something which I think I agree with, which is that the bond markets are deciding, okay, we're anxious about this data center build out now. And without us, a lot of you guys are screwed, a lot of you guys need us in order to build these things, which would suggest as he puts forward that some of these smaller, newer AI names, the Neo Clouds that have just become very hot and popular, that they actually risk genuinely going out of business. And perhaps that's how the trade unravels. What do you make of his comments? He fancies himself one of the consolidators. So clearly, good, bad, or indifferent results from the AI industry. This first round of like a railroad boom like everyone in his dog financing a railroad. This is going to go through a round of restructuring and reconstruction and consolidation. That's just going to happen one way or the other. And Elon Musk is talking from the position of, I fancy myself one of the big boys who's going to come out the other side, right? And I'm going to be buying, I'm going to be buying these little guys out of bankruptcy and it's going to be great. I'm going to buy them at $0.60 on the dollar and it's going to be fantastic. Whether that's true or not, I mean, you know, we've probably discussed the relative precariousness of the financing of his two companies too. But I'll say this for him, he is a master fundraiser and someone who is a master fundraiser is going to have a chance at being one of those consolidators out on the other end, right? So I think that's definitely true. If anyone's not going to be affected by capital drying up, it's the richest man in the world. You may, we may like him, dislike him, be impressed, not be impressed. The guy has proven he knows how to scare up money, right? That, you know, and he's done some incredible things on my view on an industrial level, but on a financial level is tell it seems to be equally great. Say this is what transpires, say that we do see that continually the bond markets are demanding more from these AI data center companies, a lot of them can't make good on those payments, some of them start to go out of business. Is that how the stock market enters the correction that everyone has been waiting for for so long? Is this sort of actually the beginning of the end, not Armageddon, but at least some significant drawdown that constitutes anything close to resembling a real correction? Let me start by taking the other side of the argument. One thing that if you're going to have a crazy investment euphoria, it's good to start with some companies who have a lot of money and have really good businesses. And so there's four or five of the hyperscalers that whatever happens to AI, they went into the situation having the most profitable businesses in the history of the world. Alphabet, Amazon, Meta, Microsoft, Apple, Apple's not participating. So take them off the list. But anyway, so you've got these cash machines at one end, and that's really good. And to the degree that the AI data center bubble starts to deflate, investors might look at those companies and say great, they don't have to pay for this crap anymore. They can just go back to churning out free cash flow, buying back their own shares and paying dividends instead of sinking every penny into a data center down in Louisiana, right? And those stocks might go up. That doesn't mean there, I mean core weaves not going up, core weaves going to zero under this. And everybody who cares, so like the big pillars of the stock market might stay standing under that circumstance, the circumstance being like holy crap, we don't actually want to finance this much capacity for AI data centers. A lot of people will feel the pain, but those pillars might stay standing. But you do have another set of companies that have become incredibly important that won't fare so well. That's the semiconductor complex, Nvidia, Broadcom, and work your way right down, right? Those things would lose a massive amount of value, right? And that would be a shock, right? And a less big a shock than if it happened on Microsoft, but Nvidia right now, Microsoft and the other hyper-skillers, but Nvidia right now is the most valuable company in the world still today, I think. And so those, that would be a nasty shock for those guys. So would it be a catastrophic 2008 style correction? My guess is no, because of the hyper-skillers would probably do okay. Would there be some smoldering wreckage to pick through? Yes, will you be glad you own some 10 year treasuries with a 5% yield going in? Probably yes again, you know, certainly. And by the way, the nice thing about the 5 year, the 10 year treasury, if I might just return to that topic here briefly, with a 5% yield on it. And you can get almost a 5% on the 5 year, right? The nice thing about that is even if inflation does go up a little bit and rates don't go up a little bit, you have a little cushion in there. You know what I mean? The 10 year yield at 2%, you got no insulation, right? You know, once you have a 5% yield and some of that yield is real yield, you got a little, you got a little give. It's not going to make you rich, but it'll protect you, you know? And that's exactly what people want right now, it seems. Yeah. Yeah. Well, it's really interesting stuff. Robert Armstrong is US financial commentator for the Financial Times, author of the Un-Hedged Newsletter as well. Rob, as always, we appreciate your time. I appreciate coming on the show. Okay. That's it for today. Thanks for tuning in. And if you liked this episode, please be sure to follow us on Spotify or Apple podcasts. Or subscribe to our YouTube channel. You can also follow us on Instagram, TikTok and across social media under the handle ProfG markets. We really appreciate it. Stick around this week. We'll be covering Google and Microsoft's earnings and the next Fed decision will also be breaking down the markets with the one and only downtown Josh Brown on Friday. Don't miss it. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer or Video Editor as Brad Williams. Our research team is Dan Shalon, Cristina Donahue and Mia Sovario and our social producer is Jake McPherson. Thank you for listening to ProfG Markets from ProfG Media. If you liked what you heard, give us a follow. I'm Ed Elson. I'll see you tomorrow.