Josh Brown: Anthropic Has To Lose Before It Wins

SUMMARY

Scott Galloway and Ed Elson are joined by Josh Brown to dissect Anthropic’s S-1 filing, focusing on its explosive revenue growth, profitability concerns, and the company’s competitive positioning. The discussion also covers broader AI market risks, IPO timing, and the challenges facing Netflix in the evolving streaming landscape.

MAIN POINTS

• Josh Brown highlights Anthropic's extraordinary 1300% revenue growth in the first half of the year, emphasizing its significance for such a young company. [3:00]
• The panel debates the meaning of Anthropic's reported losses and future obligations, distinguishing between accounting losses and operational realities. [8:00]
• Historical context is provided, comparing Anthropic’s current land-grab strategy to those of John Malone and Jeff Bezos in their respective industries. [13:01]
• Scott Galloway posits that Anthropic could become the world’s most valuable company within four years, while Josh Brown expresses skepticism about its competitive moat. [19:01]
• Anthropic’s cash position is analyzed, revealing the company retains a significant portion of its raised capital, which is seen as a sign of prudent management. [25:00]
• The discussion turns to Anthropic’s heavy reliance on external compute providers and its plans to build its own infrastructure to reduce dependency. [28:01]
• The sustainability of Anthropic’s business model is questioned, given falling per-token compute costs and the risk of slowing revenue from startup customers. [32:02]
• The panel outlines a bearish scenario for AI companies, including budget rationalization by enterprise customers and the threat of free or open-weight models reducing switching costs. [37:01]
• Josh Brown predicts strong demand for Anthropic’s IPO, suggesting the company has timed its public debut to coincide with peak market enthusiasm. [42:02]
• The conversation addresses claims of an AI bubble, with Brown arguing that current valuations do not reflect classic bubble dynamics and that tech sector earnings remain robust. [45:01]
• The strategic importance of end-to-end AI integration is discussed, noting that only a few companies, like Alphabet and Meta, currently control both models and compute infrastructure. [51:00]
• Amazon’s potential for growth through robotics and AI-driven retail is explored, with parallels drawn to AWS’s evolution from internal tool to industry standard. [54:02]
• The advantages of scale for S&P 500 companies are examined, showing how regulatory and economic challenges often benefit the largest market players. [57:02]
• Concerns about wealth concentration and job creation in the AI sector are raised, noting the disproportionate rewards for a small number of employees at companies like Anthropic. [1:02:00]
• Josh Brown discusses Netflix’s challenges, particularly its struggle to compete with YouTube on engagement metrics and the need to refocus on premium content. [1:06:01]
• The episode concludes with a positive outlook for the S&P 500, citing historical data that supports continued market gains after a strong first half of the year. [1:11:00]

DETAILED ANALYSIS

Anthropic’s recent S-1 filing has generated significant attention due to its remarkable revenue growth and the questions it raises about the sustainability of AI business models. In the first six months of the year, Anthropic reported a 1300% increase in revenue compared to the previous year, growing from $1.2 billion to $16.3 billion. This level of growth is unprecedented for a three-year-old company and places Anthropic among the fastest-growing technology firms in history.

However, the panel notes that such explosive growth is unsustainable in the long term, and a deceleration to more typical rates—such as 40-50% annually—would still be considered impressive by market standards.

Despite the headline-grabbing revenue figures, concerns persist regarding profitability and future obligations. Anthropic reported an operating loss of $693 million, a significant improvement from $2.1 billion a year earlier. The discussion clarifies that much of the reported $80 billion in losses is related to accounting treatments and convertible notes, rather than direct operational losses.

The panel emphasizes the importance of distinguishing between accounting losses and real economic losses, drawing historical parallels to companies like Amazon and Liberty Media, which prioritized market share and scale over early profitability. This approach, often described as a 'land grab,' is seen as essential in winner-take-all markets where early dominance can lead to eventual profitability.

A critical issue for Anthropic is its reliance on external compute providers, such as Broadcom, SpaceX, and Amazon, with long-term agreements totaling hundreds of billions of dollars. The company has indicated plans to invest heavily in building its own compute infrastructure, a move that would require substantial capital expenditures but could reduce dependency on competitors and improve long-term margins. The panel discusses the strategic risks of relying on rivals for core infrastructure, noting that vertical integration—where a company controls both the AI models and the underlying compute—could become a key differentiator.

Currently, only a few firms, notably Alphabet (Google Gemini) and Meta (Muse), have achieved this level of integration.

The sustainability of Anthropic’s business model is further questioned in light of falling per-token compute costs and the heavy reliance on venture-backed startups for revenue. Data suggests that 80% of spending on Anthropic and OpenAI comes from just 1% of customers, most of whom are funded by venture capital. This concentration raises concerns about the durability of revenue streams if venture funding dries up or if enterprise customers begin to rationalize their AI budgets.

The panel outlines a plausible bearish scenario in which companies implement stricter controls on AI usage, switch to cheaper or open-source models, and reduce spending with providers like Anthropic.

Despite these risks, the panel is optimistic about the timing and prospects of Anthropic’s IPO. They argue that the company is going public at a moment of peak enthusiasm for AI, which should support a strong debut and potentially rapid appreciation in market value. The discussion contrasts Anthropic’s approach to that of OpenAI, which has delayed its own IPO to address safety concerns and avoid negative headlines in its regulatory filings.

The panel notes that the current market environment allows for massive IPOs, with investment banks and investors eager to participate in the next wave of technology leaders.

Addressing broader market dynamics, Josh Brown rejects the notion that the current AI boom represents a classic financial bubble. He points to robust earnings growth in the technology sector, particularly among semiconductor companies, and notes that valuations for leading firms like Nvidia have actually declined in terms of price-to-earnings multiples. The conversation suggests that the market is pricing in significant risks and is not exhibiting the irrational exuberance characteristic of past bubbles.

The discussion also touches on the implications of scale and regulatory complexity for large public companies. The S&P 500 is dominated by firms that are global leaders in their sectors, and increased compliance costs, energy prices, and regulatory hurdles often serve to entrench their dominance. This dynamic benefits investors in large-cap stocks but raises concerns about wealth concentration and the limited distribution of gains from technological innovation.

While companies like Anthropic will create substantial wealth for a small group of employees and investors, the broader economic impact includes job creation through massive infrastructure projects, such as data center construction.

Turning to the streaming industry, Josh Brown reflects on Netflix’s recent struggles, particularly its inability to match YouTube’s engagement metrics. Wall Street’s focus on 'time spent' has put pressure on Netflix, despite its strong profitability and international expansion. Brown argues that Netflix should refocus on premium, must-have content rather than attempting to compete directly with user-generated platforms.

The company’s recent leadership changes and programming strategy suggest a recognition of this need.

The episode concludes with a discussion of market outlooks, noting that historical data supports continued gains for the S&P 500 after a strong first half. The panel emphasizes the importance of focusing on the largest, most resilient companies in the index, as these are best positioned to navigate economic and regulatory challenges. While acknowledging the risks of wealth concentration and the need for broader investor participation, the discussion remains optimistic about the potential for innovation and job creation in the evolving technology landscape.

LINKS

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• Ed Elson's Instagram
• Ed Elson's X (Twitter) account
• Ed Elson's Substack
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