Why Steve Eisman Isn't Buying Anthropic's IPO

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1:06Don't wait. Realize is Taboola's advertising platform for businesses, letting you launch campaigns on top premium websites beyond search and social. Add Realize to your media mix and scale this Q4. And as an exclusive offer for podcast listeners, new customers get $700 credit back. Just search Realize Podcast on Google or use the promo code PODCAST26. Don't miss out on this limited-time offer. Terms apply. Welcome to Prof G Markets. I'm Ed Elson. It is October 28th. Let's check in on yesterday's market vitals. The major indices climbed with tech rallying for a second day. All eyes will be on Microsoft and Google's earnings tonight. Brent crude was volatile again, but ended the day around $114 per barrel.

2:12The yield on 10-year treasuries was stable ahead of the Federal Reserve's interest rate decision out later today. And finally, meta shares declined nearly 2% following the completion of its $25 billion stock sale. The sale was part of its plan to raise nearly $100 billion in equity for its AI ambitions. Reportedly, though, the offering was five times oversubscribed. Okay, what else is happening? As we discussed yesterday, Anthropix's highly anticipated S1 is out and investors are still digesting the filing. Today, we wanted to get another opinion about the company's upcoming IPO and some of the questions that have gone unanswered, including its financial feasibility, Anthropix governance, and also the state of the AI bubble at large. So here to break it down is one

3:04of our favorite guests, Steve Eisman, the legendary big short investor and state of the AI bubble at large. So here to break it down is one of our favorite guests, Steve Eisman, the legendary Big Short investor and host of The Real Eisman Playbook. Steve, great to see you. I'm going to start general. What did you make of this filing? What jumped out to you? Well, the thing that jumped out to me the most were two things. The first was there's an awfully long list of future capital commitments that add up to something. I mean, it depends what you include, don't include, 800 to 900 billion. You know, when you're at 800, 900 billion, what's 100 billion amongst friends? It doesn't really matter. So that's just one thing that is, I don't know if the word is concerning, but just the way these people operate is, you know, that's just what they do.

3:53So that's the first thing. What I thought was even more interesting was that the numbers are only through the second quarter. Now, I have heard that they're going to have to put out third quarter numbers before they go public, although I'm not 100% sure that's correct. However, there are reports out there that at least have the revenue for the third quarter as well as the compute and infrastructure cost for the third quarter. And that actually tells a tale because for those of us who, you know, have been paying a lot of attention, as we all know, in the first half of this year, token maxing was at its height. This is, and for those viewers who don't know what that is, token maxing is where basically software engineers were ordered by their companies to use AI 24-7 and to hell with the costs.

4:46But after the first half of the year, people got a lot more cost conscious. The Chinese open weight models took more market share. And so what I wanted to see was what happened in the third quarter after the token maxing was over. And so if you look at the fourth quarter, first quarter, second quarter, and third quarter, and you look at two statistics, the sequential revenue increase, and then the revenue divided by the compute infrastructure expense. So if you go to the fourth quarter of last year, which was really just before token maxing really took off, revenue growth was 43%, and the ratio was 0.69 times, which meant, of course, that revenue was less than compute expense. Okay. First quarter, token maxing takes off,

5:40revenue growth goes from 43% sequentially to 135% sequentially, and the ratio goes from 0.69 to 1.4. Impressive. And then in the second quarter, which was the height of token maxing, revenue growth jumps again to 147%, and the revenue to compute goes to 2.08 times. Now let's talk about the third quarter. Third quarter, token maxing is over. Sequential revenue growth goes from 147% to 45%. And the revenue divided by compute goes from 2.08 to 1.7. That tells you something. That tells you that the end of token maxing has had an impact. The other thing that I have heard, I haven't been able to confirm it, is that sometime in October, Anthropic cut its prices by about 50% to try and get back a lot more market share.

6:37Whether that's going to come out on the roadshow, I don't know, but it certainly would be the data points that I would be focused on the most. Something that was notable looking through the filing is that a lot of those charts that they put up at the top showing you how the business is doing, they do not include Q3 at all. Right. That's why I bring it up. that that was an intentional decision in order to hide what seems like a reality, which is that the business growth is slowing quite significantly, as you have just explained. Do you think it was intentional? Only very intentional. That's all. Only very intentional. Very intentional. Yes. Not intentional. Very intentional. I guess this gets to sort of a larger question about this filing, which is like, how much does it actually tell us is really the question that I'm trying to get at.

7:37Because you point out the future compute commitments, which for me, that was the most important thing that I read. I'm like, okay, they have narrowed their losses. They're getting to a better place. That's good. Oh, but hold on, $800 billion coming down the line. And in addition to those $800 billion in compute costs that we're going to see at some point, they also say that they're going to significantly increase capital expenditures, which to me tells me they're going to just build data centers, which seems like a massive pivot, a massive change to the business. I don't know if they're going to build data centers, but they're certainly going to be spending a lot more money either. Maybe they'll rent, you know,

8:18and that'll cost them a ton. I don't know. But clearly, I agree with you from what you're saying that, put it this way, when you commit to $800 billion, your expenses are going up. How much they're going up, we don't know because I'm not the CFO of the company. I don't know how this is all going to play out. I read one report from someone who argued that by next year, they'll be spending 80 to 100 billion dollars in CapEx. So, you know, but I don't even know if that, is that expensed or does that go on the balance sheet? You know, it's unclear. But it seems as though eventually that's going to have to show up in the income statement in some way, whether it's through depreciation or whatever it is, it's going to show up. And it's not showing up right now. The way it shows up is

9:10at the very bottom of the document as basically like a footnote. So that's going to be a massive change to the business. And then as you say, it does seem that the current revenue is a pretty important or current Q3 revenue is a pretty important item that tells you something about the future of this business over the next, you know, near future, over the next 12 months. What I can't tell is, did this S1, did it really tell us much about this company? I think it's very, very backward looking because it's giving you a snapshot of the company at the height of token maxing. And before Chinese open weight models really started to take market share. More, you know, imagine like I only heard a report.

9:59I found a report that said that that anthropic cut prices by 50 percent to gain back market share i don't know if that's true let's assume it is that's an incredibly important data point before you go public that you just cut prices by you know this is not uh it's 47th street we know we cut them we cut prices in half you know and we're bragging. Cutting prices in half could be dangerous. The question then would be, okay, you cut prices in half. How much more market share did you get? Did your revenue go down? Did you take so much market share that your revenue went up? I don't know, but that would seem to me to be the most important question to be asked. I mean, the question for investors, the ultimate question is, do you invest in this thing?

10:48Oh, I have an answer for that. That I can answer you. Tell me. No. You kind of got to the point quickly. I was going to ask you, would you need to know the answers to the questions that you just brought up before investing? I assume the answer is yes, you would. Well, yes, but I think, look, to me, the bigger, the bigger, bigger, bigger question is, it just seems, you know, that there are no moats around this business. I mean, if it's the case that they actually did cut prices by 50%, that would reinforce the concept that there are no moats and that the only way you're going to gain shares is price. Being in a business where you are committed to spend $800 billion where your entire franchise

11:37is just simply based on price is dangerous. There is another interesting angle on this, S11 which was the governance structure oh please that is ridiculous i mean what's there to talk about you're you're a shareholder in this company you have no rights okay let's move on if you want to play if you want to invest in that company that's up up to you. It's been disclosed. You have no rights, zero rights. You want to play? Play. If you think that's very important, then you won't play. Just to clarify for our listeners, so there are multiple classes of stock here. You've got the regular voting shares. You've got the regular non-voting shares. Then you have this class T share, which is controlled by what they call the Long-Term Benefit Trust. And apparently,

12:29this is sort of this committee that gets to choose the board of directors. But most importantly, there is also a Class F share, one single Class F share, which is controlled by the seven co-founders of the company. And the share, most importantly, carries 50.1% of the vote. How much does that matter when evaluating an investment like this? Like, you know, beyond if you would like to have a vote, does it tell you something larger about this company and whether it's investable? I don't think so. Yeah, we could make the same criticism of Meta. And, you know, Meta as a stock generally has done very, very well. But this is what goes on in tech world. They don't like their own shareholders. That's basically what's happening.

13:16Founder worship institutionalized. It's supposed to go public at $2 trillion. That has been the expectation. There has been some debate as to whether that price might be cut. People were talking about $1.5 trillion. What is your expectation for when this thing goes out? I have no expectations. I have no information on what I read in the papers. Do you have a view on investor sentiment? I mean, one thing that I can't quite figure out myself is did this filing make investors more or less confident in the business? I think it actually made it more confident because people weren't pointing out that it's only going through the second quarter and what that meant. So it's gonna be very interesting to see what sentiment looks like if, if,

14:04and I don't know if this happens they have to drop third quarter numbers in before they go bubble yeah the third quarter numbers could potentially change the game if that happens would you expect that the sentiment will turn quite precipitously i mean it should but you know we're not conducting a group therapy session with the investing world. So I don't know how people- That's all I want. Me too. I don't know how people are going to react. I never know. I absolutely don't. I love when people, some people, they'll always say, it's in the price. It's in the price. And I always want to say, how do you know? Like, who did you ask? Did you take a poll? Like, on what basis do you say that? But people say this all the time.

14:50And I always say, I don't know. Just as we start to wrap up here, any other things that you're looking at in AI world, things that you think are especially important that we should keep track of? Well, the other big thing to keep track of, obviously, is the price of CoreWeave's debt. You know, at 15%, I think, although I can't prove it, I think it's prohibitive for them to raise debt at 15% and build AI data centers. But, you know, if it gets worse, then they're really out of business. You know, their business model is basically, we raise debt, we build AI data centers. That's it. That's the entire business model. And if they can't raise debt, they can't build AI data centers. That's really the...

15:35Now, maybe, you know, NVIDIA will come in and backstop the whole company. You know, it's totally possible. But barring that, you know, I would be watching the debt markets. Steve Eisman is the legendary big short investor and host of The Real Eisman Playbook, which is a great podcast. I highly recommend it. Steve, always appreciate your time. After the break, the state of play in the autonomous vehicle race. And for even more markets insights, you can subscribe to my weekly newsletter. Simply put, go to edwardelson.substack.com. price. Just $30 a line per month for you or the whole family and on their best 5G network. Switching to Verizon and shopping their best deals makes the holidays simple. Head to Verizon.com or your nearest Verizon store today.

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18:01And when the recipe calls for cream cheese, there's only one option. Philadelphia, the original cream cheese made with fresh milk and real cream. This holiday season, whether you're going all out or keeping it simple, make it really Philly good. Find your favorite holiday recipe at creamcheese.com. We're back with Prof G Markets. Earlier this week, we discussed the future of Tesla and its foray into the lucrative autonomous robo-taxi business. But while Tesla rolls out their robo-taxis across the country, they face one major obstacle, and that is competition. Companies like Alphabet, Amazon, and Uber are also looking to capitalize on the future of transportation. So we would like to take a moment to attempt to answer the following question. Who is actually winning in autonomous vehicles,

19:03and what does the future of autonomous actually look like? Today, we're speaking with our very own research team associate, Dan Shalon, who recently presented on this very topic on our ProfG Plus substack. It was a great presentation. I learned a lot. So that's why I wanted to get into it today. Dan, I see you every day, but thank you for joining me on the show. I just want to start with a general question, which you started with in your presentation, which I thought was very helpful, which is, how big of a problem are vehicle deaths today? In other words, make the case for us why autonomous is actually a good thing. It's sort of hard to conceptualize just how dangerous driving is because we as Americans

19:49do it so often. We spend on average about an hour a day behind the wheel. But every year, 40,000 Americans die in car crashes. Globally, that number is over a million. It's the leading killer of people ages 5 to 29. And I think why those numbers are relevant to autonomous vehicles is because 94% of car crashes are due to human error. So really driving isn't dangerous because cars are dangerous or roads are dangerous. It's because humans are dangerous. So I think that's why autonomous vehicles are a very exciting technology because it can allow us as Americans, as people around the world, to take something that we need to do every day and make it significantly safer. Looking at the players in this industry, obviously Tesla is getting into robo-taxis.

20:37The rollout has been, I don't even know what to say about it anymore. It's taken a while. Who are the actual players in this industry though? And how do they all stack up against each other? Yeah, so I think we can start with Tesla. And to understand Tesla's autonomous business, you really have to split it into two. So the first is the consumer side. And that's FSD. That's the software that Tesla sells directly to Tesla owners, which allows Tesla drivers to have the car drive itself under supervision. Currently, about 1.7 million people globally pay for it. But then there's the other side of their autonomous business, which is their robo-taxi business, which is their autonomous ride-share business that's in direct competition

21:22with Waymo and other players here in America. So here they're doing well. They're scaling very quickly. They have a fully commercial service in six cities. And just last month, they started putting cybercabs on the road, which are their purpose-built autonomous vehicles with no steering wheel. So despite the fact that they are moving very quickly, they are very clearly in second place to Waymo. Currently, Waymo does about seven times the amount of miles that Tesla does weekly. They're in 15 American cities. They're doing 500,000 paid rides weekly. So they're very far in the lead. I think there are two others worth mentioning. The first is Zoox, which is owned by Amazon. It's their self-driving startup.

22:03They're currently in two American cities, and they have about 100 vehicles on the road, so they're pretty early stage. And then the last one is Uber, which actually doesn't have any vehicles or technology on its own, but through partnerships with other autonomous vehicle companies like Zoox, like Waymo, it's able to facilitate autonomous rides in five American cities currently. I'm surprised to hear you say that the Tesla rollout has been quick because you say those numbers, those Waymo numbers, which are phenomenal compared to Tesla. I guess what has been promising about the Tesla rollout of their robo-taxi, specifically in contrast to Waymo, which on the outside, it seems like Waymo has been a lot more successful.

22:50Yeah. So I think the thing that Tesla has really done well in these past few months is scale up very quickly. For a while, sort of in typical Elon Musk fashion, we were getting promises about an autonomous service rolling out in Austin and California, when in reality, you'd call a Tesla robo-taxi and there'd actually be a human safety monitor behind the wheel. In the past couple months, they've ditched the safety monitors in six cities. Like I said, they're fully commercial, fully autonomous. But the biggest advantage that Tesla has over Waymo is cost. So those Tesla cybercabs cost about $25,000 to produce, whereas Waymo's cost upward of $100,000. They have a sort of much more thorough sensor load in the vehicles that they produce, which makes them more expensive. It makes them harder to build and take longer to build. So Tesla's really ramped up. Now, still, I don't mean that to say that Tesla is in first place in any sense. Tesla is still significantly behind. But just in the past couple months, they've gone from kind the winner currently is Waymo, but Tesla seems to be beginning to catch up. On an international level, U.S. and China. There are, you know, countless companies in China trying

24:26to do autonomous driving. I think where China is really winning is in manufacturing because they have the ability to manufacture electric vehicles and autonomous vehicles at a cost that's much lower than any American company. But in terms of commercialization, America is definitely in the lead because there's no company in China that's doing as many paid rides as Waymo is. So we're sort of very clearly in first place in that aspect. The thing that I think is important to know is most likely we will never see each other's technology. Like America is never going to allow Chinese self-driving companies here in America. And China won't allow American self-driving companies in China. The place where the race is really going to play out is in the Middle East and Europe, where those countries can kind of, you know, choose which country to get their autonomous driving technology from.

25:20And I think what's interesting so far is in the Middle East and in Europe, they've by and large gone with Chinese companies, whereas, you know, American companies like Waymo or Tesla have not been able to expand internationally. Do you think that is a function of Chinese technology being better, or maybe it's a geopolitical strategy? I mean, I can't tell if that says something about China's influence on Europe and the Middle East geopolitically. What is your read? I think they already have entered those countries with their electric vehicles and their vehicles in general, which has allowed them to get sort of a foothold in the market there. But I also just think it speaks to American company strategy of focusing

26:07on the domestic battle first, right? Waymo does have plans to expand internationally, but they're really focused on rolling out here in America first. One of the other obstacles for autonomous has been regulation. What is the regulatory picture in America look like right now? So it's currently very fragmented, and that's because it's all happening at the state level. What is the regulatory picture in America look like right now? It means each of these companies needs to go through the painstaking process of lobbying each state individually to be able to test and then to, you know, be able to operate non-commercially and then commercially and then expand from there. And so what that has produced is a pretty large lobbying battle between, you know, drivers unions and unions at the state level and then these robo-taxi companies.

27:02We've also seen Waymo dramatically ramp up their federal lobbying spend in the past couple years. So I think the political battle is going to continue to play out in America. I do think it's also interesting to note that autonomous vehicles are not sort of insulated from the political backlash that the rest of, you know, AI and autonomous robotics in general have received here in America. We talk about it on the show often. It's the same force that has sort of prevented data center construction in many local communities. So public opinion on AI is souring. And I think we're seeing that reflected in what people think about autonomous vehicles. There's a really interesting poll here. Gallup polled Americans in 2018 about whether or

27:47not they think that some amount of autonomous vehicles improve road safety overall and at that time about 52 percent of americans agreed they were in the same poll last year and the share of americans who agreed actually went down by 12 percent and that's despite the fact that you know in that time, autonomous vehicles went from basically not existing to getting exponentially safer every single year. So it's really, you know, it's impossible to divorce people's sentiment about AI and this technology in general from the technology itself. Despite the fact that it is statistically safer is my understanding. As we wrap up, if you wanted to make bets on autonomous, say someone's listening to this, they're like, oh, I want to bet on this

28:32thing or invest in this. I shouldn't say bet. How would you do it? What are the trades or the investments that you would look at? It's pretty early days for autonomous vehicles. But as the technology progresses, I think there's going to be a couple of places you can look at? It's pretty early days for autonomous vehicles. But as the technology progresses, I think there's going to be a couple places you can look for winners. The places where I'm going to be looking is first in the sort of picks and shovels play, which are companies that are actually making the components that go into these vehicles. I think the first opportunity here are going to be companies that make LiDAR sensors. And those are those expensive sensors

29:04that are in Waymos and Zookses and pretty much every autonomous vehicle. And I think the reason why there's an opportunity there is because currently 95% of passenger car LiDAR sensors, which are in these autonomous vehicles, are made in China. And obviously that's a huge national security risk. Those Chinese-made sensors are already banned for military use. And there's actually bills in Congress that would ban them for civilian use as well. So if that happens, there would be a huge opportunity for American companies to come in and manufacture those sensors. So there's going to be some winners there. The second is going to be in the maintenance and upkeep of autonomous vehicles, right? Because unlike Uber and Lyft, where drivers themselves are maintaining their vehicles, these companies are going to have

29:49to maintain thousands of vehicles at scale across the country. You know, they need to charge the vehicles, they need to park them, they need to clean them. Currently, there are a few startups that are looking to do this as a service for those companies. But there is an industry here in America that I think is going to see a huge windfall from this need, which is the car rental industry. You know, if you think about car rental companies, they already have these facilities around the country sort of ready to go. And just last week, actually, Hertz announced that they're standing up a new leg of their business to do exactly that, to service autonomous vehicles. So I think we're going to see more car rental companies sort of pivot in that direction as well. And then I think the last

30:30winner is going to be the trucking industry. Because if you look at trucking, about 44% of trucking's marginal costs come from driver compensation and benefits. So if you can automate those costs, you know, it's obviously very lucrative. There's currently a company called Aurora that's testing self-driving on American roads. And then Tesla also produces a semi-truck, which they say will eventually have full self-driving capabilities, although it doesn't quite yet. Dan Jelan is our research associate at Prof G Media. Really fascinating stuff. Thank you. If you want to watch a replay of the live stream that Dan did on this industry, it's like an hour long, I want to say. It's super in-depth, but it's super informative.

31:12You can go to profgmedia.com, click on the ProfG Plus tab. We do a lot of these more in-depth, deep dives over on Substack. Dan, thank you. I'll see you tomorrow. Appreciate your time. Thanks for having me, Ed. Before we end, let's return to Anthropix S1 filing, which has polarized a lot of investors. Some look at the revenue growth and they say that the company is incredible. Others look at the net losses and they say it's terrible. The largest IPO in history is bringing out a lot of emotions from investors, which I get. But it also makes me think that maybe this IPO is fundamentally misunderstood. So to end this episode, I would like to do a little bit of myth-busting on Anthropic, and more specifically on Anthropic's

32:05IPO. So, number one, yes, the company did rack up an $80 billion net loss in the first half of the year, which sounds bad, but no, that doesn't actually matter. Why? Because those losses were a product of the increase in the fair value of Anthropic's convertible notes. In other words, investors lent Anthropic money, and in return, those investors later received equity. And because of how accounting laws work, Anthropic technically had to write that up as a widening expense, but in reality, it was simply a reflection of how valuable Anthropic had become in a remarkably short period of time. So the $80 billion net loss, that's a red herring. Okay, number two. Yes, Anthropic's first half revenue grew 1,300% year over year, which is incredible.

33:03But no, as Steve points out, it has not kept up that extraordinary growth, not even close. The part that the S-1 in many places left out is that revenue growth slowed down significantly in Q3. As Steve said, it was 150% quarter over quarter in Q2, and then less than 50% in Q3. Now, that's not necessarily bad, but it does show that maybe the AI frenzy is beginning to come to an end. And finally, number three, yes, Anthropic did narrow their losses quite significantly. It was more than $2 billion in the first half of last year versus less than $700 million this year. That is good, but no, that trajectory is not going to continue. The most important numbers in the filing came at the end of the document

33:46where we learned that Anthropic has signed more than $800 billion in future compute commitments, none of which are reflected in the current income statement, but all of which eventually will be. That includes an $110 billion contract with Amazon, a $115 billion contract with Google, a $161 billion contract with Broadcom. What it doesn't include, however, are the billions of dollars in capital expenditures, which they are about to register probably to build out their own compute. That's not something I believe because I had a hunch about it. I believe that because they literally told us that in the S1. In other words, that $800 billion number is actually probably going to be a lot higher. And as a result, this company's losses are about to

34:31explode. Now, did they time this IPO so that we wouldn't have to look at those losses on the income statement? Possibly, but that's a theory. It's not a fact. And this segment is specifically devoted to things that we know for sure. The truth about the Anthropic S1 is that the income statement doesn't tell you the full story. It doesn't mean it's a bad company. It doesn't mean they don't have an incredible product. They do. But it does mean that there is still a lot of risk. The business model hasn't been figured out yet. And until it is, we must treat Anthropic with the appropriate level of caution. It's still a highly risky venture bet. Things could still go spectacularly wrong. What it certainly isn't is a proven, safe corporate investment, something that its potentially $2

35:18trillion valuation might suggest. In sum, not much has changed. But whatever picture the profitability is painting right now, all I can tell you is that next year, that picture is going to look drastically different. Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalon, Kristen O'Donoghue, and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Profiting Markets from Profiting Media. If you liked what you heard, give us a follow. I'm Ed Elson. I'll see you tomorrow.