Is the AI Bubble About to Be Tested?

Anthropic's Ambitious IPO Plans [0:00]

• Anthropic, an AI company, is reportedly preparing for an IPO in the coming months.
• The company is seeking a valuation of around $2 trillion, a figure comparable to the combined value of the 10 largest tech IPOs in history.
• This move comes despite a market where IPOs are being pulled and tech stocks face scrutiny.

  "Anthropic, the AI company whose CEO has just asked his industry to slow the pace of AI development and asked the government to regulate everyone to make sure that they do, is expected to go public in the next few months, hoping to raise more money more quickly than any other company in history."

Market Headwinds for IPOs [1:05]

• The NASDAQ is at a record high, and US business output is growing, yet IPOs are being canceled.
• Experts find this surprising, especially with the NASDAQ at its peak.
• OpenAI has delayed its listing to next year, and Anthropic's filing, expected in August, has not yet appeared.

  "Jay Ritter, who runs the IPO initiative at the University of Florida, told Bloomberg that this is especially surprising with the NASDAQ at a record."

NVIDIA: The Undervalued "Shovel Seller" [1:46]

• NVIDIA, a key player in AI hardware, is the world's most valuable company, with its stock up significantly.
• Relative to its expected profits, NVIDIA is trading at its cheapest valuation in over a decade.
• The video aims to explain why the company selling the essential tools for AI appears cheap while AI companies themselves aim for high valuations.

  "And yet, IPOs are getting pulled."

Challenges in Valuing AI Companies [2:54]

• Traditional valuation methods like discounted cash flow and comparable company analysis are difficult for AI firms.
• There are few similar listed companies for comparison.
• Forecasting cash flows for a company in a new industry with rapidly growing revenue is challenging.

  "Antropic poses challenges for both of these methods."

Impact of Rising Interest Rates [4:05]

• Rising interest rates, with the 10-year treasury yield at a high, negatively impact future profit valuations and increase borrowing costs.
• This "double whammy" affects companies like Anthropic, making future profits less valuable and data center construction more expensive.
• This may explain the recent IPO cancellations, such as Whole Tech and SB Energy.

  "Matt Kennedy of Renaissance Capital told Bloomberg that rising rates are a double whammy for companies like this."

The Inflation of Total Addressable Market (TAM) [9:15]

• The concept of TAM, the total potential market for a company, is used to justify high valuations.
• Estimates for the AI market's TAM have ballooned rapidly, from $22.7 trillion to $30 trillion and even $60 trillion.
• This rapid inflation, with Morgan Stanley estimating a $60 trillion market shortly before potentially underwriting Anthropic's IPO, raises questions about the methodology.

  "In just four months, the addressable market grew by $37 trillion, which is faster than Anthropics revenue and quite a bit faster than the economy it is supposed to be carved out of."

The Circular Economy of AI Investment [23:05]

• The AI industry exhibits a circular financial structure where companies invest in and support each other.
• SoftBank funds OpenAI, which rents data centers from SB Energy, which uses NVIDIA chips and is partly owned by OpenAI.
• NVIDIA guarantees debt for SB Energy's campus in exchange for exclusive hardware use.

  "SoftBank borrows at junk rates to fund OpenAI, which rents the building that NVIDIA guarantees and fills with NVIDIA chips."

NVIDIA's "Growth Value" Stock Paradox [26:20]

• Despite strong revenue growth, NVIDIA is trading at a low multiple of its expected profits, making it appear cheap.
• Explanations include the market treating NVIDIA as a cyclical company at its peak, competition from in-house chip development by major customers, and the risk of AI spending slowdowns.
• The uncertainty surrounding AI labs' future profitability contrasts with NVIDIA's more predictable business.

  "Jensen Wang, NVIDIA's chief executive, told a Goldman Sachs conference this month that NVIDIA is the world's first and only growth value stock, telling the audience that the company is incredibly misunderstood."

The Collapsing Price of AI Output [33:20]

• While the cost of AI inputs (chips, power) is rising, the price of AI output is collapsing due to competition and cheaper models.
• The cost of achieving a given level of AI performance has fallen dramatically.
• This creates a challenging environment for AI labs selling their services, even as they aim for high valuations.

  "The Epoch AI estimates that the cost of getting a given level of performance from an AI model has fallen about 13-fold a year since 2023, which they say may be faster than for any other transformative technology in history, including electricity, computing, and DNA sequencing."