Anthropic, OpenAI Should Not Be Allowed to IPO, Says Ed Zitron #investment #economic news #finance #

What are we getting, I don't want to say we, what are the bulls out there getting wrong about AI? Because you've made no secret that you don't see any there there. Yeah, so I think people are conflating a semiconductor rally with an underlying successful business, which doesn't really exist. Anthropic's current revenue growth, which is deeply questionable in the fact that they leaked profitability, manipulated by Elon Musk, of course. Their growth is coming because people cannot measure how much an AI task actually costs. And a couple of months ago, Anthropic started charging their enterprise customers the actual token rates. What this has led to is suddenly businesses are going, oh, how much money are we spending? Uber's, I think it was Uber's COO, Andrew McDonald, said that they're having trouble justifying the AI spend based on the actual return that one could actually measure it. So you've got a thing where you can't measure the costs, and you can't measure the return on investment. What do you call that? You call it a thing without an ROI. Isn't it, though, safe to say, Ed, I think about this, that there is going to be, when there's any new technology, there's a lot of money thrown at something, right? A hot new idea, whatever it is. And that ultimately, like we've talked with some experts in the AI world, they're saying, all of these large language models, not everything's going to exist. Because right now, it doesn't cost you anything to use it. But at some point, there will be a cost, and people will start to select what they want to play with. And so is it a case of right now, I mean, at some point, there will be some winners, some losers, and we'll see some things filter their way out, and that there will be some return on investment for some of the larger players when it comes to AI? Do you not see some winners and losers in this, or some winners in this? I think the winner is Jensen Huang, and the winner is the construction firms who have got prepaid for all the data center construction. Maybe Sam Altman and Dario Amadeu have become billionaires through this. But when it comes to the actual businesses, you can't find anyone who can measure the ROI, because you can't do it. So when it comes down to the model companies themselves, they're horrifyingly, horrifyingly unprofitable. I think OpenAI lost 20-something billion dollars last year. Anthropic's probably not far behind this. And we don't have access to their books. Of course, of course. But once they file for an IPO, we'll get something. Yeah, and that's the thing. When we see these S1s, I think it's going to be kind of a massacre. Because I think that people have this view that these companies are becoming more profitable, or even have a path to profitability. And they don't have one. But somebody could say, and Carol, we talk about this all the time, Amazon for years didn't really have profits. Well, that's the thing, though. Now it's a behemoth. And then AWS came along. And now it's this juggernaut that has made a lot of people very wealthy. But the thing with Amazon is, between 2003 and 2017, Amazon Web Services, actually all Amazon CapEx, was around $57 billion normalized for inflation. Between that whole time? In that entire time. And they were cash flow positive in nine. The classic thing with the dot-com reconciliation thing as well, things went poorly. But after that, there was useful infrastructure. No such story exists here. GPUs, AI GPUs specifically, have very few other use cases. And on top of that, if you're talking about incomplete data centers, it's going to cost just as much money to finish them today as it will in 10 years. And similarly, a Blackwell, a B200, GB200 rack, MVL72 rack, for example, will cost just as much, if not more, in electricity 10 years from now. There is no pick-up-and-fix this story. Perhaps there'll be some on-device large language model use. But we are talking an industry that has absorbed over a trillion dollars in the last three years. The media attention from everyone. And these continual stories about the magic of AI. But when you say, hey, is it making any money? They go, oh, no. Oh, we couldn't possibly. We don't do that yet. But don't worry. Uber lost a lot of money. Uber burned about $32 billion, which is less than half of what Anthropic has raised in the last six months. So, I think it's safe to say there's a lot of smart investors are in this. Smart companies are in it, right? I mean, pick your big hyperscaler. They obviously want to be around for a long time. So, I'm just, like, how do you explain their bets on all of this? So, I have this theory called the ROTCOM bubble, which is the hyperscalers are out of hypergrowth ideas. We haven't had a new iPhone. We haven't had a new cloud computing. We haven't really had a new platform that would turn into the next Google search or Amazon Web Services. So, they thought that large language models were going to be the panacea. That they were going to be creators of API growth. That they were going to be the new infrastructure play. Load up the GPUs. Sell access to everyone. The problem is no one checked to make sure any of this was profitable. And we still don't know if GPU compute is actually margin positive, which is crazy considering the amount of money going into it. And when we look at the companies that actually are selling it, Cori, for example, they burn billions of dollars, 20-something billion dollars worth of CapEx this year, about the same amount in debt. And their customers are NVIDIA, OpenAI through Google, OpenAI through Microsoft, and Meta, who does not have an AI strategy. It's very strange like that Twilight Zone episode with the scary child. We're all trying to pretend that Meta actually has a plan here. They don't have one. So, is Apple kind of smart? Because we've talked with our Mark Gurman about this. Have they kind of been relying on Google, right, and Gemini, and not necessarily doing that big spend? And they're not doing CapEx on- No, exactly. Well, I think what happened with Apple is they released Apple Intelligence, which may be the largest scale anti-tech radicalization in history. My non-tech friends, I've heard nothing about AI from them. Moment Apple Intelligence comes out, they're like, this is the worst thing I've ever used. And I think that made Apple go, maybe not. Maybe we should take a step back. But their CapEx is minimal. They're spending about as much in CapEx, ironically, as Amazon was spending on AWS way back when. So, I think Apple is cautiously holding back and kind of absorbing the headline after headline, the ridiculous headline of Apple's behind in AI. Behind in a losing proposition, more like. We're speaking with Ed Zitron. He's the founder and CEO of EZ Primary Research. He's got the Better Offline podcast. He writes the Where's Your Ed at newsletter. Ed, just so everybody's aware, do you have skin in the game? Are you shorting any of these companies? Do you have a financial interest in what you're talking about? I invest in words. I love doing the newsletter. I do. I think I'm spreading a great deal of financial literacy and of how to pull apart the narratives of these companies. But no, I don't, because the market is irrational. And the market is inherently invested in something that I think is destructive, especially the SpaceX IPO. And OpenAI and Anthropic should not be allowed to go public. They are dangerous, lossy companies that are going to be added to indices that will sink 401ks. You know, it's interesting that you say this because I got a text on a group chat today from a friend of mine who's not happy about the idea that he's, as an index fund investor, he's going to be forced to have to buy SpaceX, for example, which is sort of the subject of yesterday's Big Take. Everybody should check it out on the Bloomberg Terminal. There's a lot we want to get to with you. We only have a couple more minutes. You've got to come back and do some more with us. Before you go, what happens if markets, you said markets are irrational right now. If markets become efficient, and I think a lot of people think markets are efficient, if markets view this the way that you're viewing this, what are the repercussions of that bubble bursting? I think the majority of gains based on AI success are going away. I think the neoclouds like Iron, Corweave, Cypher Mining, and Terrawolf as well, all of them perhaps not going to zero, but they're going to be shells of the corporations they used to be. I actually don't know how Corweave survives this. I think NVIDIA is looking for the most aggressive haircut you've ever seen, for example, because they currently are not the way I've, based on research I've done, it looks like it's taking about six to 12 months to install a single quarter's worth of GPUs from NVIDIA. They've yet to put out any kind of guidance about this. They clearly know. But if you go and look at Microsoft, for example, none of the data centers that they have announced have broken ground since 2023 have actually been finished. The Fairwater data centers, they've said that that was fully complete. It's not even half complete. It's one of the strangest things I've seen in history, and I think what it is, is that these companies know that they can get away with it. They know that the SEC scrutiny isn't there, and they also know that the froth is big enough that everyone kind of loses together. It all comes out in the wash when it's proven that there is not a there there. Do you get calls from these companies? No, I don't hear back from Microsoft or OpenAI or any of them. But you reach out? I do. I asked for comment and they just, I guess my email gets lost. Sam Altman and Dario Amadei, there's PR people have mentioned coming on my show, but then they go quiet, probably because I'm quite critical of them. They know I'd ask the questions they don't want to answer. Why do you think, I want to poke at something that you mentioned earlier. Why do you think OpenAI and Anthropic shouldn't be allowed to go public? Because they are lossy companies. They do not have a path to profitability. Anthropic, they leaked, or however, that they were profitable. They were profitable in two months when Elon Musk gave them a discount on their compute through SpaceX. Clearly planned leaks, clearly planned financial engineering. No normal profitable company does things like this. OpenAI and Anthropic are both horribly unprofitable and they are not getting better. The information reported a few weeks ago, OpenAI had a negative 122% non-gap operating margin. But again, just because a company doesn't make money doesn't mean it shouldn't go public. Just because a company is not profitable doesn't mean it shouldn't go public. Let me reframe this then. I don't think these companies will survive. And I think that investors are doing exit liquidity for venture capital. And I think that these are dangerous, unstable companies that have faced basically no real scrutiny for most of the years of their investment. You have journalists and analysts who are actively cheering them on. This is a dangerous precedent and it's a dangerous thing for retail investors who are being conned by this. And I mean the whole ROI conversation. That is a result of most people experiencing AI via subscriptions that are subsidized. Meaning you can burn anywhere from $3 to $13.50 for every dollar of your subscription. So people don't know how much this stuff actually costs and they are investing and believing in it and creating workflows around it based on services they likely cannot afford long-term. Just got 20 seconds here. So we have a story. Uber has set usage caps on some AI powered tools used by its staff to manage costs after blowing through its AI budget earlier this year. We're going to increasingly see these stories in your view? Yes, we will. And we've already heard a similar story coming out of Walmart. I think Bloomberg reported yesterday.