Prof G Markets
00:04:04 · Ed Elson
Compare that to the $19,000,000,000 they've spent this year, and you realize this business is about to become unrecognizable and not in a good way. Can they back out of these contracts? Only some of them. Some $437,000,000,000 of that spending is noncancelable with Broadcom describing its contract terms as, quote, absolute and unconditional. To put $437,000,000,000 in context, that is more than the entire company was worth less than eight months ago. This isn't to say the company is bad. It simply means that the notion of imminent profitability implied by the income statement is not only a red herring, but also a gross misrepresentation of what the business is about to look like. It won't just be unprofitable. It will be deeply unprofitable. And by the way, Anthropic admits this. Per the filing, quote, our increasing efforts to build out our compute and infrastructure require substantial capital expenditures that are changing the cash flow of our business. Translation, massive losses are on the way. So if Anthropic is about to lose gobs of cash, who will provide the money? Answer, you. Although the company has a staggering war chest of more than a $130,000,000,000, its costs will be more staggering. That is why it's going public. Anthropic needs to raise money because if it doesn't, it won't be able to pay its bills. The company going public for financing reasons is not unique. What is unique, however, is how much Anthropic is raising, roughly a $100,000,000,000. That is already enormous, but it's especially enormous when you realize how much money everyone else is raising too. Over the past ten months, the hyperscalers, Microsoft, Meta, Amazon, Google, and Oracle, have raised more than $300,000,000,000 in debt and equity. The reason they're doing this is to build data centers. And while that number might sound crazy, it is, just know that next year's will be crazier. Meta has planned another $60,000,000,000 equity offering in 2027, And Morgan Stanley estimates that hyperscaler debt issuance could exceed $1,000,000,000,000 by 2028. Put another way, the true test of capital won't be 2026. It'll be 2027. The more important question, however, is why cash cows like Amazon and Google need more money. Aren't they already ridiculously profitable? Increasingly, the answer is no.
00:06:38 · Ed Elson
Due to the $800,000,000,000 they spent on AI this year, every hyperscaler aside from Microsoft is now cash flow negative. This is remarkable considering these companies are known as the most profitable businesses in history. That's where you come in. Over the past several years, very few companies have asked you for money. IPO issuance has been historically low, and existing companies have been happy to finance operations on their own. But that is all about to change. All of a sudden, many of the world's most valuable companies need hundreds of billions of your dollars all at once. This is very unlike big tech whose profits have historically been so strong that the very notion of asking for anything would have been seen as an admission of defeat. The AI era, however, is very different. We are all in this together now. Financial independence is a relic of the past. The trouble with needing money is it makes you extremely vulnerable when people are no longer willing to be generous. It's like being a kid. Your fate is in someone else's hands. The good news for kids is that most parents are willing to help them no matter what. Companies, however, do not have that luxury. Investors will let them die. A couple weeks ago, we got our first taste of what that might look like. After big tech reported solid earnings, investors got the AI jitters largely in reaction to how much money these companies continue to spend. Google plummeted more than 10% overnight, erasing roughly $500,000,000,000 in market value. Intel fell more than 25%, its worst week ever. It was a bloodbath. But that's what happens when investors get anxious. They become harder to please and easier to frighten. On Wall Street, this emotional state is known as the music. It became especially famous in July 2007 when Citigroup CEO Chuck Prince told investors that when the music is playing, you've gotta, quote, get up and dance. In other words, don't shy away from an exuberant market. Four months later, however, the housing bubble popped. Citigroup had to write down billions of dollars in losses, and Chuck Prince was removed as CEO. He was right about what to do when the music was playing, but he was wrong about when it would stop. The obvious question for investors is how the music sounds right now. As always, it is hard to tell. One thing that's for certain though is that it is playing.
00:09:16 · Ed Elson
Meta's recent $25,000,000,000 stock sale was five times oversubscribed. Amazon's $25,000,000,000 bond deal drew $62,000,000,000 in orders, and Microsoft just pulled off one of the most sought after debt offerings on record. That is not the sound of silence. At the same time, some of the music is starting to go out of tune. In the past month, CoreWeave's bond yields have exploded to 15%, and many neo clouds have seen their valuations get cut in half. Meanwhile, the Financial Times reported that Anthropic will not receive the investment grade credit rating that it wanted. Hello, drug status. And OpenAI just slashed its funding target by $10,000,000,000. In both cases, exuberance was lower than previously anticipated. These aren't signs that the party's over, but they do suggest that the lights are coming on. Our greatest musical signal, however, will be the Anthropic IPO set to take place within the next two weeks. The expectation is that demand will be through the roof, which means the stock should rocket upward as soon as it lists. That is exciting for Anthropic, but also terrifying as anything less will be seen as evidence that something has gone wrong. The trouble with capital markets is that they're temperamental and moody. They will fall for you just as quickly as they will turn you away. That is why you should never depend on them. Yes. They have been very generous over the past few years, But that's because the MDMA has been hitting and the music has been blaring. Everyone is nice in that environment. I get the sense though that the drugs are beginning to wear off and the sun is starting to rise. As for the music, I hear it, but it's getting fainter. This edition of Simply Put was produced by Claire Miller and Alison Weiss, edited by Natalia Cabrera, and engineered by Benjamin Spencer. Our research associate is Dan Shalon. Our design editor is Olivia Rudy Hall. Special thanks to Vivian Zhang, Audrey Hettelman, and Rohit Bohler. Thanks for listening to Simply Put by Ed Elson. You can find this piece and more on Substack. Just go to edwardelson.substack.com.
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