Monologue: Anthropic Slows Down

Ed Zitron (0:01)

Causo Media Hello, welcome to this week's Better Offline monologue. I'm your host, Ed Zitron.

On Wednesday night, Anthropic's Q3 numbers dropped through leaks from meetings with investors in preparation for its IPO, and boosters have been packing their lunches like they're bugged wire on the way to a press conference. Why? Because despite hitting $16.8 billion in revenue, sales only grew by 46% quarter over quarter, which might seem like a lot, but Anthropic's entire sales pitch to investors and the general public was that its revenues were eternally parabolic, and based on the oinking and squawking from Twitter, the expectation was that it would hit $20 billion or more for the quarter. Another reason the hogs are so upset is that Anthropic neglected to include a new annualized run rate figure. A made up number derived from multiplying, in most cases, a trailing 28-day period's worth of revenues by 13, specifically to make the company's revenues seem bigger and extrapolate growth in what I'd describe as a deeply deceptive way.

The reason Anthropic neglected to do so is that it's likely that the number was lower than boosters expected. A few months ago, Bloomberg and others reported that said run rate had hit $65 billion at the end of July, which means that the expectations had them set anywhere from $75 billion to $90 billion. Though I should add that these numbers are all complete bullshit and none of these articles ever explain how the number is derived and over what period it referred to. In fact, Bloomberg just says a short period annualized. It's completely fucking useless. In any case, boosters have loved these big, beautiful numbers because they allowed them to express Anthropic's growth in terms that made things look far better than they were. A few months ago, multiple outlets had reported investors expected Anthropic's run rate to hit $100 billion by the end of the year, and now many of them are posting that's not going to happen with the tone of someone who found out their dog is dying. The leak also revealed that Anthropic had an adjusted operating margin of 11% and adjusted gross margins of 85%.

Adjusted is a term used to describe stuff that's not up to the standards of gap, but generally accepted accounting principles, because it leaves out costs like stock-based compensation, R&D or well, anything the company wants to because it's non-gap.

Nevertheless, some outlets are using this to suggest that Anthropic is approaching profitability, as in it would be profitable if it wasn't for all the expenses.

Another wrinkle in the story was that Anthropic noted that 5% to 7% of its revenues came from distillation, as in Chinese model developers using its services to train their own models, meaning that anywhere from $840 million to $1.17 billion worth of its Q3 revenues came from its competitors building competing products and paying them for the privilege. Anthropic recently reported that it had taken measures to reduce these attacks, as they call them, by more than 90%, which is good news on a competitive level, but also means that its revenues have, for several years, been artificially inflated, probably by billions of dollars. This all puts Anthropic in kind of a bind. To match its current revenue growth, it would need to grow another 53.6% or so quarter over quarter, as its revenue base is now, I assume, about 5% lower, meaning it needs about $25.8 billion or so in Q4. Anything less than 20 is a fucking disaster, by the way. And per RAMP data, 80% of Anthropic and OpenAI's enterprise revenues come from the top 1% of its customers, with the vast majority of those being unprofitable, unsustainable AI startups, meaning that that growth will mostly have to come from venture-backed money-losses in perpetuity.

RAMP also reported last week that AI spend is falling, despite rising usage, at exactly the wrong time for all of this to be happening. And all of this times extremely poorly, with an aggressive sell-off of Better Offline third-of-the-century CoreWave, which has now reversed somewhat, because of the dunces that bet on the financial markets, on Nvidia CEO Jensen Huang, saying that CoreWave was in good financial condition, and that Nvidia did not need to backstop it, despite the fact that Nvidia has already backstopped CoreWave's leases, and sunk billions of dollars into the company. I do not see these factoids in a single fucking story mentioning Jensen Huang's comments, because journalism is apparently too fucking difficult for everyone.

And this problem did very little to calm the bond market, despite the stock bursting a little bit by about 3% as I'm looking at it. CoreWave's debt now trades at a yield of at least 14.6%, with its worst one trading at 15.47%, meaning that those closest to the actual money, the actual debt, the actual, you know, payments of stuff are pricing CoreWave's debt like the junkiest of the junk. I think the worst of the junk is like 17-20%, so some ways to run, but pretty damn junky. And as all of this boiled over, Gartner released a report saying that by 2030, 80% of NeoClouds would have ceased operations, adding that forecasts for AI revenues in the next three years were trillions of dollars short of what it would take to have even a 12% return on invested capital. And I must be clear, the assumption that they have is that AI will make $3.5 trillion worth of revenue, and they're still trillions of dollars off. Just to be clear, AI is not even making $300 billion of annual revenue. People would know this if they fucking looked, including Gartner. Gartner has the resources. Why is no one fucking bothering? I feel like I'm taking crazy pills. And this was mere days after a Jeffreys report came out that said that the most likely outcome of the so-called AI boom would be a massive capital destruction in the US. I just need to ask you a question. Is that good?