IPO Fever Heats Up For OpenAI and Anthropic

**Travis Hoium** (0:02)
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Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium, joined today by Lou Whiteman and Jason Moser. And guys, we've had a lot of earnings over the past couple of weeks, but the backdrop of all of these earnings reports seems to be Anthropic and OpenAI racing towards their IPOs. They're trying to get as much compute as possible. They're trying to grow revenue as much as possible. We've already seen SpaceX IPO this year got to, I think it was nearly a $2 trillion valuation. I don't know if it ever popped above that, fell back pretty quickly after that. But Lou, we did learn this week that OpenAI is starting to catch up to Anthropic with their revenue because of a little bit more aggressive pricing. They're also, I think both these companies are willing to pay top dollar for a compute. So as we think about that, and I want to get to some of the Neo Clouds in particular in just a moment, but how should we be thinking about the growth of these companies and whether or not it's profitable because it does seem a little bit like they're growing almost at all cost at this point?

**Lou Whiteman** (1:10)
As they should. Yeah, and that is. And profits are not a requirement. They are not, as we saw with the SpaceX IPO, profits are not required now.
Growth is required, so they are doing what they should do.
Look, it could turn tomorrow, but as of now, there's a lot of source of capital. And as Anthropic and OpenAI go public, there's even more sources of capital. You need profits when the market tells you, you need profits. The hard thing as a management team is, is that you don't necessarily get a exit sign three miles in advance. You don't get a warning. So you better be ready for profits when they come. But as of now, there is nothing that tells us that the market is worried about this quarter's results. They're curious about what you're building. So go out and build something and may at long continue for these companies because I don't know when they're going to hit profitability.

**Travis Hoium** (2:04)
Jason, is that how you see this? Because it does look a little bit like I think the Neo Clouds were a good example over the past week. The numbers are phenomenal.

**Jason Moser** (2:11)
Lou is right.

**Travis Hoium** (2:11)
The revenue numbers are great. But every time I look at these companies, I'm wondering what is sustainable and what isn't because it does seem like we have this exponential growth to infinity. I mean, I even saw projections that SpaceX could add 10 gigawatts worth of capacity, which would be several hundred billion dollars worth of end of customer revenue. I'm not sure exactly where that comes from, but it does seem like these companies are growing at an astronomical pace, and I'm not sure where the end of that is.

**Jason Moser** (2:44)
Yeah, it makes me think of that investing style of GARP, growth at a reasonable price. These businesses are just growth at all cost, and right now, the market is pricing these companies entirely on growth, no regard as far as margins are concerned. I mean, I get that. That makes sense today.
The question mark is how long will that be tolerated? My suspicion is it will be tolerated for a while. What's that old saying? The market can remain irrational far longer than you can remain solvent or something like that. I mean, it may seem irrational, and we're not exactly seeing the clear pathway to profitability because I mean, you're right, all of these investments in compute, I mean, they're paying up for it, of course.
But what is the ultimate return? And I think that's what we're all kind of asking. It's probably easier to see at the enterprise level right now, but my bet is if you just go take a walk down the main street and just ask a random sample of people like, hey, how is AI impacting your life today? Most people would probably be like, I don't know, I mean, maybe they use an LLM, right?

**Travis Hoium** (4:05)
It makes customer support worse to interact with.

**Jason Moser** (4:08)
I mean, so I think we need to sort of see that aha moment where we really understand how these dots all connect.
I don't doubt that we'll get there eventually, but until we do, these companies are just going to continue to raise money, spend on growth at all costs, and hope, I guess, that profits come at some point. I think the question mark for me is where do those profits really ultimately come from? Because, again, going back to just general society, most people are not paying for subscriptions to Claude or GemEye or whatever. I mean, it is just a very miniscule percentage of people that actually pay for those subscriptions. So that's not going to be a source of income. That's not going to be the solution. That begs the question, will it be advertising? Well, I don't know. It's worked out well for Google, but I guess we'll just have to wait and see.