The AI Boom Is Running Out Of Easy Money

In this episode of Ed Elson’s newsletter, Simply Put, Ed unpacks why the music is starting to fade in the AI trade. Subscribe to Simply Put to get the newsletter in your inbox. Subscribe to the Prof G Markets Youtube Channel Follow Prof G Markets here: Instagram: instagram.com/profgmarkets X: x.com/ProfGMarkets TikTok: tiktok.com/@profgmarkets Threads: threads.com/@profgmarkets Follow Ed on Instagram, X and Substack Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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• 1:13Ed Elson?

  Welcome to Simply Put. I'm Ed Elson. This week, when the music stops.

• 1:25Ed Elson?

  For the past three years, we have asked the same question. Is generative AI a viable business? That might sound dumb as generative AI revenues have exploded. However, so too have generative AI losses. Take it from Elon Musk, who just admitted that the Grok bot business model isn't working. We're still early, I know, but not that early. It's been four years since ChatGPT launched, and not one pure play LLM maker has demonstrated an ability to make more than it spends. That doesn't mean AI companies are doomed. It just means they're unproven. And with trillions of dollars on the line, proof matters.

• 2:07Ed Elson?

  That's why Anthropic's recently released IPO filing was so important. It was our first proper look at whether the LLM making business actually works. On first look, the answer was yes. Revenue grew roughly 1,200% to $33 billion through the first nine months of the year. And more importantly, operating losses sank by about 75%. That is a great signal that the most valuable AI startup in the world is about to become profitable. But then I read the fine print. And while it's true that Anthropic narrowed its losses this year, that's not going to last. Why? Because they're about to spend more money than you could ever comprehend. This is what investors are missing.

• 2:51Ed Elson?

  Not only will Anthropic not be profitable next year, it will likely be more unprofitable than ever before. When capital is cheap and seemingly infinite, that's no problem. However, that's all about to change as well. First, an explainer on Anthropic's spending. Despite its rosy income statement, the full story is buried in the liquidity and capital resources section of the S1. There we learn about its purchase commitments, i.e. the amount of money that Anthropic has promised to spend on compute in the future. The original filing left the total blank. The amended version, released last week though, filled it in. $895 billion, nearly all of it on compute.

• 3:35Ed Elson?

  In other words, Anthropic's costs are about to explode. Over how many years exactly? Good question. Roughly $70 billion of those commitments must be paid in the next 12 months. And another $450 billion is due by the end of 2030. Do the math and you are looking conservatively at compute bills of more than $100 billion per year starting next year. Compare that to the $19 billion 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 billion of that spending is non cancelable,

• 4:15Ed Elson?

  with Broadcom describing its contract terms as, quote, "absolute and unconditional." To put $437 billion 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

• 4:58Ed Elson?

  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 $130 billion, 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. A company going public for financing reasons is not unique. What is unique, however, is how much Anthropic is raising. Roughly $100 billion. That is already enormous, but it's especially enormous when you realize how much money everyone else is raising too.

• 5:43Ed Elson?

  Over the past 10 months, the hyperscalers, Microsoft, Meta, Amazon, Google and Oracle, have raised more than $300 billion 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 years will be crazier. Meta has planned another $60 billion equity offering in 2027. And Morgan Stanley estimates that hyperscaler debt issuance could exceed $1 trillion 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?

• 6:26Ed Elson?

  Aren't they already ridiculously profitable? Increasingly, the answer is no. Due to the $800 billion 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.

• 7:09Ed Elson?

  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 of weeks ago, we got our first taste of what that might look like.

• 7:53Ed Elson?

  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 billion 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's CEO Chuck Prince told investors that when the music is playing, you've got to, quote, "get up and dance." In other words, don't shy away from an exuberant market.

• 8:38Ed Elson?

  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. Meta's recent $25 billion stock sale was five times oversubscribed. Amazon's $25 billion bond deal drew $62 billion in orders, and Microsoft just pulled off one of the most sought after debt offerings on record. That is not the sound of silence.

• 9:20Ed Elson?

  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, jug status. And OpenAI just slashed its funding target by $10 billion. In both cases, exuberance was lower than previously anticipated. These aren't signs that the party is 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,

• 10:04Ed Elson?

  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.

• 10:48Ed Elson?

  As for the music, I hear it, but it's getting fainter.

• 10:56Ed Elson?

  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 Shalom. Our design editor is Olivia Rudy-Hall. Special thanks to Vivian Zhang, Audrey Hettelman and Rohit Bola. 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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