The ONLY Anthropic IPO Video You Need to Watch — Transcript

Full transcript

1. 0:00The moment everybody's been waiting for
2. 0:01is finally here. The biggest event of
3. 0:04this year by far, and I'm absolutely
4. 0:06blown away. It's unlike anything I've
5. 0:09ever seen, and the entire offering just
6. 0:11says buy. But, enough about Sydney
7. 0:13Sweeney's latest ad campaign. You see
8. 0:15what I did there, right? We're here to
9. 0:17talk about the Anthropic IPO, and the
10. 0:19number one thing that everybody wants to
11. 0:21know, should I buy Anthropic stock or
12. 0:24not? At the end of this presentation,
13. 0:27you're going to be able to make that
14. 0:28decision yourself confidently. Now, the
15. 0:31biggest bull case for Anthropic is their
16. 0:33astronomical growth. Anthropic has some
17. 0:37of the biggest growth numbers ever seen
18. 0:39for any company. If this was yearly
19. 0:42growth, it would be extremely high, but
20. 0:44it's not. It's quarterly growth. This is
21. 0:47exactly why Anthropic is one of the most
22. 0:49highly anticipated IPOs ever, but we
23. 0:52really need to start digging deeper
24. 0:54here. First question to ask is what sort
25. 0:57of money is required for them to
26. 0:58generate revenue growth like this. Well,
27. 1:01it's not as bad as you might think. So,
28. 1:03Anthropic buys computing power, and then
29. 1:06turns that into revenue. That's their
30. 1:08biggest expense, compute. And this past
31. 1:11quarter, they actually had a positive
32. 1:13operating margin. And when we start
33. 1:16digging into the S1, there's an
34. 1:17interesting table here which breaks down
35. 1:20compute and shows what they consider
36. 1:23cost of revenue, and what they consider
37. 1:25R&D. And this is meaningful, of course,
38. 1:27because it's what you use to calculate
39. 1:29gross margins, but moreover, that R&D
40. 1:32expense is actually Claude being used to
41. 1:35make itself better. This idea of
42. 1:37recursive improvement. That's why Claude
43. 1:40can do such amazing things. And when we
44. 1:42look at the margin trends, they're
45. 1:45moving in the right direction. So, you
46. 1:47can see here operating efficiencies
47. 1:50showing up as increasing margins over
48. 1:52time. And look at this chart. It's the
49. 1:55revenue they realize per dollar they
50. 1:57spend on compute and it's increasing
51. 1:59rapidly. You can then reconcile this
52. 2:02against the actual financials and see
53. 2:04that their biggest operating expense is,
54. 2:07of course, compute, but they're
55. 2:09requiring less and less compute as a
56. 2:12ratio of revenues over time. Now, you're
57. 2:14going to see headlines in the media
58. 2:16recently about this $80 billion loss.
59. 2:20That's almost all non-cash accounting
60. 2:24noise. So, what basically happened there
61. 2:26is Amazon loaned them about $6.2 billion
62. 2:30in convertible notes. So, that means
63. 2:32that Amazon can take their payment back
64. 2:35in equity. Well, the equity is
65. 2:37absolutely skyrocketed, right? And that
66. 2:39increase in the value of those
67. 2:40convertible notes is an accounting
68. 2:43adjustment and it appears under
69. 2:44liabilities. Now, for all practical
70. 2:47purposes, this isn't something that Joe
71. 2:49Retail needs to concern himself with,
72. 2:51but let me show you something that's
73. 2:53really concerning. After you subscribe
74. 2:56to this channel, we're not going any
75. 2:58further until you do.
76. 3:00We have a piece coming out shortly on
77. 3:02the best nuclear stocks, so you'll
78. 3:04definitely want to see that. All the
79. 3:06power needed to run this compute needs
80. 3:08to come from somewhere. So, check this
81. 3:10out. Anthropic has about $132 billion in
82. 3:15cash and short-term investments. That's
83. 3:17quite impressive, right? So, they've
84. 3:19been able to grow this company as fast
85. 3:21as they have and still have a sizable
86. 3:24cash balance. Now, we don't know how
87. 3:27much they're going to raise during this
88. 3:29IPO. Word on the streets is that it's
89. 3:31going to be about $100 billion.
90. 3:34So, they're going to have roughly $230
91. 3:35billion in cash, right? But they need a
92. 3:38whole lot more going forward. When we
93. 3:40start digging into the S-1, we find some
94. 3:44interesting non-cancelable commitments
95. 3:47they've made. Non-cancelable.
96. 3:50And we also see some large commitments
97. 3:52made to neo cloud providers, which may
98. 3:55or may not be able to provide the
99. 3:57capacity they're promising. We also see
100. 3:59some hardware commitments for TPUs from
101. 4:01Google and other companies. Now, it all
102. 4:03boils down to this. You can see this
103. 4:05summarized section of their
104. 4:07infrastructure service arrangements, and
105. 4:11this amounts to upwards of $620
106. 4:16that they need to come up with. So, they
107. 4:17have presumably $230
108. 4:20in cash after the IPO. They're going to
109. 4:22need about 523
110. 4:25billion over the next 5 years to meet
111. 4:28these commitments they've made, which
112. 4:30we've charted out here. This is equally
113. 4:32spread over the stated time frames. Now,
114. 4:34where's all the funding going to come
115. 4:36from to pay for these commitments?
116. 4:38Probably dilution and debt, but what if
117. 4:41easy capital dries up? And going further
118. 4:44into the S-1, you come across their
119. 4:45Broadcom deal. So, this is the biggest
120. 4:48line item in the filing in terms of
121. 4:50liabilities. It's this $160 billion
122. 4:535-year lease rent agreement with
123. 4:56Broadcom. So, it's more of the circular
124. 4:58financing stuff. Google makes the chips,
125. 5:01Broadcom then funds the ownership,
126. 5:03Anthropic rents usage, and it's
127. 5:06non-cancelable
128. 5:07except in the case of default, and a
129. 5:10third of this roughly is being financed
130. 5:12by Broadcom. So, again, this circular
131. 5:15financing and these circular
132. 5:17arrangements, and this is mostly still
133. 5:19off Anthropic's balance sheet. Also
134. 5:22represents a conflict of interest,
135. 5:24right? So, Broadcom is the chip
136. 5:26supplier, a leaser, potential lender,
137. 5:28equity holder. It's rather intertwined.
138. 5:32So, these are all things to think about
139. 5:33before you click that buy button, folks.
140. 5:36But, the most important thing you need
141. 5:38to be thinking about is valuation, cuz
142. 5:41there's a lot of hype associated with
143. 5:42this IPO. Forget about what the share
144. 5:45price says. That's absolutely
145. 5:46meaningless. We use valuation ratios to
146. 5:49determine if a company is cheap or
147. 5:51expensive. Now, the most common ratio
148. 5:53you'll hear people throw around is PE or
149. 5:56price to earnings, but we can't use that
150. 5:58here because Anthropic isn't profitable.
151. 6:01And that's perfectly fine. We don't
152. 6:02expect them to be profitable. We expect
153. 6:04them to be growing, right? And they're
154. 6:06growing like mad. So, for disruptive
155. 6:08technology companies, we use what's
156. 6:10called our simple valuation ratio or
157. 6:12SVR. That takes market cap and divides
158. 6:15it by annualized revenues. And because
159. 6:18we're using annualized revenues, last
160. 6:20quarter times four, it's very responsive
161. 6:23as opposed to taking trailing 12 months.
162. 6:25Works particularly well with
163. 6:27fast-growing companies like Anthropic.
164. 6:29So, the press has suggested a proposed
165. 6:32IPO valuation of around $2 trillion,
166. 6:34which is roughly what SpaceX is valued
167. 6:36right now. Let's assume this high end of
168. 6:39the range that the media is giving us,
169. 6:41all right? So, we divide that $2
170. 6:42trillion valuation by annualized
171. 6:45revenues of $46 billion,
172. 6:48and we get 43.
173. 6:50Is that high or low? Well, we need a
174. 6:53benchmark. So, we calculate this for
175. 6:55about 150 disruptive tech stocks. The
176. 6:57average is about 8.3. So, to put that
177. 7:01into perspective, you have some quite
178. 7:04highly valued companies. Palantir, I
179. 7:06think is around 62. So, Palantir is
180. 7:09actually has a higher valuation than
181. 7:11Anthropic would at $2 trillion.
182. 7:14And Anthropic is the fastest-growing
183. 7:16company probably we've ever seen. So,
184. 7:18let me tell you exactly what we do with
185. 7:20every IPO that comes across my desk. We
186. 7:23never invest or even consider investing
187. 7:27until they filed at least a 10-Q or a
188. 7:3010-K. This serves two purposes, okay? It
189. 7:33lets the dust settle, and it also lets
190. 7:35us see what the balance sheet looks like
191. 7:38post-IPO.
192. 7:40So, this is the most important thing you
193. 7:41can do right now. I want you to
194. 7:44establish an SVR cut off. That means a
195. 7:47valuation that you would consider
196. 7:49Anthropic to be too rich at. Do it right
197. 7:52now. Write it down. You can adjust the
198. 7:54number later. Just get a number on
199. 7:56paper. Now, maybe you really want in on
200. 7:59this IPO. Okay, you can move that to,
201. 8:01let's say, five times the average. Now,
202. 8:04write that down. When Anthropic starts
203. 8:06trading, get a market cap number, and
204. 8:09then run the valuation numbers, right?
205. 8:11Don't buy shares unless they trade below
206. 8:14your cut off. Simple. As I said, we
207. 8:16don't even consider investing in any IPO
208. 8:19until they filed a 10-K or a 10-Q. Now,
209. 8:22this worked out really well for SpaceX,
210. 8:24which started trading at an SVR of 112
211. 8:28and now sits at 34 today. See, now you
212. 8:31have a plan for Anthropic IPO day.
213. 8:34You're not getting caught up in the
214. 8:36media hype frenzy, and you now
215. 8:38understand how to calculate a simple
216. 8:40valuation ratio for any disruptive tech
217. 8:42company. Life is good. Now, a few other
218. 8:45bits and bobs worth noting here. So,
219. 8:48first of all, it's going to trade under
220. 8:49the ticker ANT. And Anthropic did say
221. 8:53under risk factors that their technology
222. 8:56could destroy mankind, but that's okay
223. 8:58because they're also a public benefit
224. 9:00corporation, so that's all good now. And
225. 9:03what that means is they have a
226. 9:04governance structure that has what's
227. 9:06called a long-term benefit trust, and
228. 9:08these are independent individuals that
229. 9:11make sure the company's interests aren't
230. 9:13just aligned with shareholders, but are
231. 9:15also aligned with humanity as well. And
232. 9:18some other bits in the S-1, we look at
233. 9:20customer concentration risk, which is
234. 9:22not an issue. So, for the first 6 months
235. 9:24of this year, they had one customer that
236. 9:26accounted for 11% of total revenues. No
237. 9:29other customer accounted for 10% or
238. 9:31more. Interestingly, their top five
239. 9:34customers represented about 25% of
240. 9:37revenues for the first 9 months of this
241. 9:39year. So, that isn't horribly bad. And
242. 9:42we look at international breakdown, you
243. 9:43see, okay, United States is 72% of
244. 9:47revenues, all right? And they break down
245. 9:50revenues into two segments,
246. 9:51consumption-based and
247. 9:52subscription-based, with consumption
248. 9:55being about 80%. They also mention net
249. 9:58retention rate, which is a whopping 900%
250. 10:02for whatever that's worth. And they
251. 10:03noted this dependency on cloud
252. 10:06marketplaces, so the hyperscalers that
253. 10:09they're generating revenue through, so
254. 10:11around 48% of total revenue. So, risks,
255. 10:15right? There are always risks.
256. 10:16Company-specific
257. 10:18risk, these are the unknown unknowns
258. 10:21that come from within a company and can
259. 10:23change everything. They're never for the
260. 10:25better, right? These are the things you
261. 10:27don't see coming. Right now, the
262. 10:29cybersecurity situation is objectively
263. 10:32mental. They're saying, like, in the
264. 10:35past month, 3% of all cybersecurity
265. 10:38issues ever uncovered were uncovered in
266. 10:40a single month, this month. Now, the
267. 10:42bulls will say, okay, only Anthropic can
268. 10:45save us from disaster. The bears might
269. 10:47point to a situation, what happens if a
270. 10:49massive coordinated attack takes place
271. 10:52and there's a decision made to issue
272. 10:54some sort of global moratorium on AI
273. 10:57development. What do you think's going
274. 10:58to happen to all these circular
275. 11:00financing deals that start falling
276. 11:02apart, right? So, always allocate a
277. 11:04fixed amount of money to any given
278. 11:06position, and that's what you're willing
279. 11:08to commit. Set your valuation target in
280. 11:11advance. You can use this simple
281. 11:13valuation ratio, and this same targeted
282. 11:16approach you can use for investing in
283. 11:18other stocks, especially ones that are
284. 11:19hyped. As for us, we're going to sit
285. 11:21this one out until Anthropic files their
286. 11:24first 10-Q, and we're going to take a
287. 11:26look at what's going on since their IPO,
288. 11:29what the valuation might look like. Now,
289. 11:31I'm going to go ahead and leave you with
290. 11:32a piece that we did on ranking the
291. 11:35Magnificent Seven. It's rather
292. 11:36interesting. Some of the names we talked
293. 11:38about today, the hyperscalers are in
294. 11:39there. Give that a watch next. Thanks so
295. 11:42much for taking the time to watch this
296. 11:43video today.