Why Steve Eisman Isn't Buying Anthropic's IPO

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Ed Elson (1:57)

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. The 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 percent 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. OK, what else is happening? As we discussed yesterday, Anthropic'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, Anthropic's governance and also the 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?

Steve Eisman (3:23)

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, depends on what you include, don't include 800 to 900 billion. 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, that's just what they do. So 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 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.

But 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 percent, 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, revenue growth goes from 43 percent sequentially to 135 percent sequentially, and the ratio goes from 0.69 to 1.4. Impressive. Then in the second quarter, which was the height of token maxing, revenue growth jumps again to 147 percent, and the revenue to compute goes to 2.08 times. Now, let's talk about the third quarter. Third quarter, token maxing is over, revenue, sequential revenue growth goes from 147 percent to 45 percent, 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 percent, to try and get back a lot more market share.