I am a dabbler, by nature, moving on from topic to topic, but this year, I have spent more time than usual on AI, but that is because it seems to be part of almost every business or economy related story. I tried to value SpaceX ahead of and after the filing of the prospectus for its initial public offering before moving on to the question of whether it and OpenAI and Anthropic should be part of the S&P 500 index. I started my analysis of how AI would affect the rest of us, from doomsday to do-nothing scenarios, largely in response to Citrini and Citadel reports on the topic. in August 2026, I took my first big picture look at AI as a business, which I titled its bar mitzvah moment, with a look at its potential market, business economics and moats. That look was a prelude to the initial public offerings in the works (then) for Anthropic and OpenAI, and I provided a simple way to reverse engineer how much investors would need in revenues from these companies to justify their sky-high pricing. In early October, I looked at how the massive investments in AI are playing out in the aggregate earnings, cashflows and invested capital at US companies, and why it is contributing to holding the market intact, in the face of rising rates. Just last week, I argued that both Anthropic and OpenAI would be priced, rather than valued, for their initial public offerings, using what I called buzzy metrics (like annualized run rates) and promised that I would try to value the company, when it filed its prospectus. On October 26, Anthropic filed its prospectus, and at the risk of being called hopelessly wrong by both bulls and bears, I will try to value the company, using what I see as its most likely pathway, while also leaving the door open for you to disagree with me, and pick your own pathways to valuing the company.
The Prospectus
Before I delve into the details of the S-1 filed by Anthropic, it is worth noting that at 416 pages, it is long and filled with distractions, as has become the case with almost every initial public offering in the last two decades. (I chronicled this trend in my post on the disclosure dilemma, arguing that while filings have become longer, they have become less informative). The Anthropic IPO has useful information that both bulls and bears will spin to justify their priors, and in the section below, I look at key disclosures, broken down by valuation input into revenue growth, profitability, risk and reinvestment categories, from both an optimist (glass half full) and pessimist (glass half empty) perspective:
- Revenue Growth and Composition: The good news in the revenue story is that the company has grown exponentially over the last year, with revenues in the first two quarters of this year about fourteen times as high as the revenues in the first two quarters of the last year, but the sobering news is that revenue growth slowed down in the third quarter of 2026, as OpenAI increased market share, compute capacity acted as a constraint and some enterprises moved to cheaper open source models. The good news on customer composition is that the number of enterprises that spend more than $1 million a year on Claude increased to 1900, from less than a hundred a year ago, but the bad news is that the company still has concentrated revenues, with its top five customers accounting for 25% of revenues.
- Operating and Net Profitability: In bad news, Anthropic reported an operating loss, corrected for non-cash and one-time charges, of over $ 8 billion, for the first six months of the year. The actual loss reported was $80 billion, but $72 billion represented a non-cash charge, expensing the conversion option of the convertible bond. The good news, though, is that not only are the trend lines working in their favor, with the company claiming that it had an operating profit in the most recent quarter. The company is also delivering its revenues more efficiently over time, with all of its expenses decreasing as a percent of revenues across the quarters, with compute costs, its biggest cost,, decreasing from more than 250% of revenues to 48% of revenues, on a quarterly basis.
- Reinvestment for growth: AI agents are computing power hogs, and AI companies invest immense amounts in compute power. The financial statements in Anthropic's prospectus actually do not show this investment at the moment, with neither the cap ex in the statement of cash flow nor the debt (and invested capital) in the balance sheet showing substantial investment in compute power. Before you accuse Anthropic of hiding the truth (or worse), the company is open about its future compute power commitments, reporting hundreds of billions in compute commitments in future years. The good news is that Anthropic is now catching up with OpenAI, which had the lead on compute power, but the bad news is that this catching up has not been cheap, in terms of cost commitments in future years. It i s also worth noting that compute power will need to be renewed and reinvested in, and while chip costs (a key component) may come down, data centers, facing opposition from communities, may become more expensive.
- Operating and Regulatory risk: Anthropic's argument is that its customers, once they adopt Claude models within their enterprises, will find that they become so integral to operations that they will not abandon them (making revenues sticky and the business less risky). That has not been fully tested yet, and it is entirely possible that spending on AI agents is cyclical and that companies will pull back in bad times. On the financing front, committing to hundreds of billons in compute, purchase and lease commitments exposes the firm to default risk (with a bond rating of BB+), but in response the company will argue that its access to new capital, as a publicly traded large market-cap company, will make this risk recede. In addition, its cash balance, already at $114 billion, and likely to be bulked up with another $100 billion from the IPO offering, will give them more than enough cash to cover commitments in the next few years.
Source for AI risks: https://airisk.mit.edu
- The company's revenues are growing quickly, and for at least of the subset of users that are its core customers, it is delivering on its promise. That said, the revenue growth rate is clearly coming down, as scale, competition and compute power constraints all work against the company, and the fact that Anthropic is so interconnected in both operating and financing practices with other big players in the AI game (the circularity that is often noted by critics) does lead to the potential for double counting and opacity.
- The expenses for Anthropic, across categories, are growing slower than revenues and that is helping reduce operating losses and putting the company on a glide path to not just profitability, but significant profitability. That said, notwithstanding one quarter's reported profits, the company is not quite there yet, and will require significant revenue growth to keep ahead of the expenses (from the compute power commitments) that will hit the income statement in future periods.
- The immense compute power commitments at Anthropic have not only allowed the company to lock in what it needs to deliver growth but are also largely responsible for the high gross profit margins reported by the company, because they have moved company's biggest expense from the variable to the fixed operating cost column. That has come at a cost, since this not only increases the company's operating leverage, but also will result in further commitments down the road, as compute power needs to be replenished and grown.
- Anthropic has built a buffer against risk in the form of a very large cash balance, which will be augmented after the IPO, and it is is possible that Anthropic's customers will become reliant on its products, making its revenue stickier. However, it is exposed to risk on three dimensions - in operations, from high operating leverage, in financing, because of its contractual content cost commitments and on survival, since it is dependent on growth to meet its obligations.
The Anthropic Valuation - Story and Numbers
The prospectus, with all of its disclosures, is still a document rooted in the past, and the value of a business lies in your expectations for the future. In this section, I am planning to leave the safety of the historical disclosures and embark on forecasting the future, knowing fully well that I am going to be wrong, and perhaps even massively wrong, in my attempts. At each step of the story, I will offer you a chance to disagree with my take, and provide your own, with the resulting change in inputs. I know that you are busy, but if you can humor me and play alone, we may both benefit from this exercise.
1. The Scaling Up Story
The value of Anthropic, and any of the other AI product and service companies that will come later, ultimately rests on how big you believe the AI products and services market will become, and what portion of that market you company will inhabit. I started on this discussion a couple of months ago in my assessment of AI as a business, and argued that the total market for AI products and services will depend on four assessments -
- whether AI is a productivity tool for employees or employee replacement, with the latter creating a larger market for its products and services.
- whether that employee displacement will be primarily at the top end (top quintile) of the wage scale or across the board, with the latter pushing up the total market.
- whether AI's impact will be concentrated in a few industry groups or across many or most industries, with the market expanding as AI's reach expands
- whether the AI disruption will be primarily in the United States and a few other geographies or global, with a global reach leading to a bigger market.
2. The Profitability Story
There is clearly movement towards profitability in the prospectus, but where will the profit margins end up after Anthropic has gone through its growth pains? To estimate where margins will converge, it may help to start with the recognition that the AI product and service market, once established, is likely to have a mass market segment where AI agents and models, many of which may be open-sourced and less powerful, will compete for customers primarily on pricing, and a premium segment, where frontier models, many of which will remain closed models, powered by client data, dominate. The operating margins for the former are more likely to resemble those of business services (roughly 10%), whereas the operating margins for the latter will converge on the operating margins of enterprise software (close to 40% for the top quartile), with compute power and R&D becoming the reinvestment needed to deliver these products.
Anthropic is targeting the premium market, as reflected not only in its current revenue breakdown, with almost 80% from enterprises paying based on usage, but also in its focus on using its newly acquired compute power to build next generation models rather than service current clients. I will assume an end-mix of 75% of revenues from premium products, and 25% from the mass market, giving me an unadjusted pre-tax operating margin of 32.5%; that would put them at the ninth decile of US companies in 2026.
Here again, you may find room for disagreement, either on the market mix (mass market versus premium), the margins for each market segment or business economics, as companies scale up. You can make your choice below:
3. The Reinvestment Story
The reinvestment assumptions you make for Anthropic will revolve around understanding compute power, in terms of both how it is created as well as how much frontier models will need that power, as they become more powerful and scale up. For the moment, Anthropic, with its compute commitments in excess of $600 billion and greater, has sent signals that it views compute power as a necessity to power its growth ambitions as well as to maintain an edge over competitors (current and prospective).
The nature of compute power, and especially with the chips that represent a large percentage of costs, is that investments will age quickly and will need replacement. This is an indication that if Anthropic's growth ambitions come to fruition, there will be more reinvestment needed in future years, to both replenish and grow compute power. It is true that technology may make chips cheaper, but that may be more than offset by new models demanding proportionately more power, and if you add in the real estate and power needs of data centers, there is room for diverge on how much additional investment will be needed in future years. I do believe that the compute power crunch will stay in place for the near term, but will ease over time, and that belief translates into my assumption that Anthropic will need to invest about $1 for every $3 in additional revenues, going forward. That would be in line with what technology companies are generating as revenues per dollar of invested capital today, but with the leap in revenues that Anthropic is forecasting, it will translate into large dollar reinvestments each year.
As with revenue growth and profitability, I will leave the door open for disagreement, and you can make your choice below:
While I have highlighted my base case assumption in black, note that lower sales to capital ratios will make the business more capital-intensive, and increase the cash drain from reinvestment.
4. The Risk Story
As you start listing out the risks that you will be exposed to as an Anthropic investor, you may be overwhelmed both by the number of risks as well as their diversity. To gain some control in this process, I will divide the risks into three groups:
a. Operating risk: The AI business is still evolving, and while Anthropic's growth and customer stickiness so far are noteworthy, the business will face challenges as it grows, and lives through market and economic turmoil. Thus, for Anthropic's customers spending on AI as a productivity tool, we do not know whether they will cut back their spending, and if so how much, in bad times, and for those who plan to replace employees with AI agents, whether the pace and extent of usage will change with the economy. The number that is designed to convey this risk into the valuation is the cost of capital, and for Anthropic, assuming that it carries the risk of large technology companies with an added burden of the compute commitments, I will estimate a cost of capital of 9.74%. Again, for perspective, note that the median cost of capital for US firms in September 2026 was 9.16% and that the third quartile for US firms is 9.88%. If you disagree, here are your choices:
b. Financing risk: The main talking point for many Anthropic bears is the compute commitment that runs into hundreds of billions, creating fixed costs that will be a drag on profitability, especially if revenue growth falls short of expectations, as well as the risk of distress. While bondholders are right to be trepidatious and will point to the current bond rating of BB+ for the company as backing for their concerns, there are two reasons why failure risk will be suppressed. The first is that the company has the cash balance to sustain itself through the near terms and meet its contractual obligations. The second is that, as a high-profile trillion-dollar plus publicly traded company, it will have access to capital. I do believe, though, that if revenues grow at anemic rates, both these benefits will dissipate, as cash gets burned through and the market cap collapses, and I will estimate a probability of failure of 10% for the company, with a loss of half its value if that happen. If you want to disagree, go into the input sheet worksheet of the spreadsheet, and if you scroll down to cells B52 and B53, you can put in your own views:
c. Regulatory risk: With AI companies, the question with regulatory risk is not whether it will show up, but when it does, what form it will take. Anthropic and OpenAI have both invited the government to restrict how this business will grow, and while the cynical rationale for these pleas is that it may keep out competition (especially from China), the regulations and restrictions are coming. As with the large social media companies, the effect of these regulations will not be a cessation of business but an increase in operating expenses and loweer profit margins. I estimate that the regulatory effects are likely to be mild, at least on a relative basis, and that it will shave my initial operating margin estimate of 32.5%, for Anthropic, down to 27.5% (a reduction of 5%). You can make your own call on the regulatory effects on margins below:
You may disagree with me both on the likelihood of regulation and its effects, and while my base case is highlighted in black, you can diverge in your choice.
The Valuation
With my storyline and inputs for Anthropic in place, I valued the firm, and you can check out the spreadsheet at this link. Rather than drown you in cash flow line items, I will present my Anthropic valuation, with a trillion in revenues by 2036, a target operating margin of 27.5% (with the target margin of 32.5% adjusted for regulatory drag), reinvestment that delivers three dollars of revenues for every dollar of capital invested over time and a cost of capital of 9.74%:
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| Download spreadsheet |
With my upbeat story for Anthropic, I estimate a value for the equity of $1.475 trillion, at the lower end of the offer pricing range ($1.5 to $2 trillion). Note that my debt for the company is close to half a billion and includes my estimate of the present value of their compute commitments, and that my cash balance includes an estimated $100 billion in proceeds from the offering. If you are bullish, you will undoubtedly find ways to tweak my numbers, and find that a slightly higher operating margin and a lower cost of capital or a longer growth period, will get you to whatever number you want. If you are bearish, you will do a similar exercise in reverse, lowering growth and raising discount rates, to capture your priors. It was precisely to avoid this gaming that I tried to get you to make your own choices on revenue growth, margins, reinvestment and risk along the way, and if you had the time and patience to play along, here is what the range of outcomes would look like.
- The worst-case Anthropic story, where its target revenues limp (at least relative to expectations) to $200 billion in 2036, margins converge on the mass market (10%), compute power stays scarce and costly (sales to capital of one), cost of capital rises to the third quartile for US companies (9.88%) and the regulatory effect on margins is drastic yields worthless equity, In fact, the value of equity is -$373 billion, and the company will not survive as a going concern.
- The best-case Anthropic story, where target revenues surge to $1.5 trillion in 2036, margins converge on the premium market (40%), compute power becomes cheap (sales to capital of four), cost of capital falls to the first quartile for US companies (7.79%) and the regulatory effect on margins is non-existent yields a value of $4.04 trillion for equity.
Corporate Governance and Lock-up Provisions
With publicly traded companies, corporate governance obviously matters, but in the last few decades, that recognition unfortunately has led us away from a sensible rationale of why it matters. In fact, much of academic research on corporate governance as well as practitioner measures of it have become focused on the minutia and details of governance, with number of board members, length of their tenure and board composition (insiders vs outsiders) all vying for front place. The truth is that corporate governance scores, which claim to measure how strong or weak governance at a company is, have been gamed by companies, making them poor indicators of shareholder power.
So, what exactly is corporate governance? In my view, it is a measure of the power that shareholder (in public) and outside investors (in private businesses) have to change the way businesses are run, if they disagree with the way they are run by incumbent. It is therefore true that this power will be greater at companies where boards are more willing to push back against CEOs and activist investors are involved, and will diminish when you change the rules of engagement to make it more difficult for shareholders to push for change. I have long argued that the institutional investors who sat on their hands, when Google decided to break a precedent, at least in US markets, at its initial public offering by issuing shares with different voting rights. Their success has opened the door for a host of tech companies that have used the same structure to protect founder power at companies and effectively reduced the power that shareholders at these companies have to push for change to selling their shares and moving on.
With Anthropic, these concerns about entrenching founders at companies is magnified by two choices that the company has made:
- Voting rights: This company has decided to exhaust the alphabet in terms of share classes, with five classes of shares, with different voting rights.
Note that the class A shares come with standard voting rights, but the voting structure, with a benefit trust picking the board and the founders controlling 50.1% of voting, no matter how many more shares may be issued in the futur, effectively emasculates public investors. - Public benefit corporation: The company has structured itself as a public benefit corporation, and in its prospectus, it states that "we may make decisions that we believe appropriately balance the pecuniary interests of our stockholders, the best interests of those materially affected by our conduct, and the Company Purpose, but that negatively impact the short-, medium-, or long-term performance of our business or the market price". Given the worries that people have about AI being a force for destruction, a concern that Dario Amodei has actively cultivated, this protection against shareholder power may seem to be a good thing, but we need to be open eyed about what this structure does. It does not protect society from AI's evils, but puts power in the hands of the few (the founders and members of the benefit trust that they pic) at the top of Anthropic, hoping that they use that power well. If you, as an investor, have had bad experiences with top management at companies using corporate responsibility and ESG as cover for self-serving activity and hypocrisy, the Anthropic structure is that structure on steroids.
I would draw your attention to my last post on Anthropic, where I argued that the company will be priced, and that almost everyone who trades the stock right after the offering will be pricing, not valuing the stock. That is not meant as a slight, but as a reality check for investors, and especially those investors who seem to believe that the market owes them a payoff, just because they care about fundamentals. Markets owe nothing to any of their participants, and as an investor, I have to not only recognize that reality, but act accordingly. Consequently, I will keep an open mind and wait for Anthropic to be priced for its IPO, and if it is priced well above my estimate of $1.48 trillion, I will sit out the frenzy. To the question of why I would not sell short, if it is priced well above my value, my response is that while I have faith in my valuation, albeit with a range around my estimate, I have no reason to believe that the market will or should agree with me, and even if it has made an error, correct within my time horizon.
Once Anthropic starts trading, its story will continue to evolve and change, and given AI's presence in the economy and markets, I can guarantee you that it will be a roller coaster. It is possible that we have underestimated the possible payoff from AI, and that Anthropic continues to rise in market cap, but it is just as possible that major parts of the storyline, from revenue growth to margins to risk, will come under stress, leading the market to reassess what it thinks Anthropic should be priced at. Obviously, those stresses will also cause my estimate of the value to change, but it is not just a possibility but almost a guarantee that there will be a day that Anthropic will be undervalued, and it may be sooner than you think. I valued Facebook at the time of its IPO in June 2012, and while I found it over valued then, at a stock price of $36, it became a bargain just three months later, when the price hit $18, making me a buyer of the stock. The structure of Anthropic, with the public benefit facade and the voting rights abuse, will require a much larger discount on my value estimate, but the market may accommodate that requirement as well.
YouTube Video
Anthropic Prospectus
Anthropic Valuation
Blog Posts on AI in 2026
- To a Trillion Dollars and Beyond: A SpaceX Odyssey!
- Revisiting SpaceX: A post-Prospectus valuation
- OpenAI, Anthropic and SpaceX: The S&P 500 Inclusion Question and Investment Consequences
- AI Scenarios: From Doomsday to Do-nothing!
- AI's Bar Mitzvah: From hope & hype to business questions!
- Stock Prices, Earnings and Cashflows: The AI Effect!
- From Eyeballs to ARR: Buzzy Pricing Metrics and the Anthropic Pricing
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