Anthropic's Q3 results raise questions about its $1.5 trillion IPO valuation

Rising costs and slowing growth

Anthropic recently released its third-quarter financial results, revealing a complex picture for the company's upcoming public offering. While the firm saw its revenue grow by nearly 47% from the previous quarter, its expenses are climbing at a faster rate. This trend has led some analysts to suggest that the math for a successful IPO is becoming increasingly difficult.

The most notable figure in the report is the 77% jump in compute and infrastructure expenses, which reached $9.9 billion. A significant portion of this bill, roughly $5 billion, came from purchasing short-term capacity. Anthropic usually secures its compute 12 to 18 months in advance, but it must pay a premium when demand exceeds its pre-secured supply.

These rising costs directly impacted the company's adjusted operating margin, which dropped from 19% to 15%. As Fortune reported, the company attributed this decline primarily to the high costs of securing that short-term capacity. This shift suggests that as the company scales, the cost of maintaining its infrastructure may outpace its ability to generate immediate profit.

The high price of admission

Anthropic is currently seeking a valuation in the range of $1.5 trillion to $2 trillion for its initial public offering. However, institutional investors are reportedly pushing the company to aim for the lower end of that range. Analysts warn that even the lower end might be considered too expensive given the company's current revenue levels.

To put the price tag in perspective, a valuation above $1.41 trillion would require investors to pay more than $40 for every dollar of revenue the company generated over the last year. According to a study by Jay Ritter, only 14 out of 4,110 IPOs between 1980 and 2024 achieved such a high price-to-sales ratio. Furthermore, those specific IPOs delivered average returns that were lower than the broader market.

Based on Anthropic's roughly $35.3 billion in revenue over the past four quarters, the target valuation would mean investors paying between $43 and $57 for every single dollar of sales from the previous year. Ritter noted that to justify a valuation north of $1.4 trillion, Anthropic would need to show a way to reach yearly after-tax profits of at least $100 billion. Currently, only a few massive corporations like Nvidia, Apple, and Microsoft reach those profit levels.

Margins and infrastructure hurdles

Despite the pressure on operating margins, Anthropic maintains a healthy implied gross margin of 85%. This figure only accounts for the cost of serving customers and excludes the much larger sums spent on training models and research. These research costs are booked as separate operating expenses, which can mask the underlying profitability of the core service.

Investment analysts are concerned that high compute costs will continue to put pressure on these margins as the company expands. Because Anthropic is not a standard investment-grade company, it may face limited access to the low interest rates typically available for debt. If the company needs to borrow money to fund its compute capacity, that debt will likely be expensive, further weighing on its bottom line.

However, some researchers argue that paying a premium for compute is a rational strategy for staying ahead in the AI race. Frontier models can command premium prices and help improve the efficiency of other models. By investing heavily in research now, Anthropic aims to reach capability thresholds that allow it to capture more market share from competitors like ChatGPT.

Liquidity and long-term outlook

Anthropic currently holds a significant amount of liquidity to fund its ongoing operations and research. As of September 30, the company had about $131.8 billion in cash, cash equivalents, and short-term investments. This reserve, combined with the proceeds from its IPO, provides a substantial cushion for the company to continue its heavy investment in AI technology.

The company's operations also generated $6.6 billion in cash during the first nine months of the year. While this provides a steady flow of capital, the long-term success of the IPO depends on whether revenue can compound fast enough to absorb future commitments. Investors will be watching closely for any new spending commitments or the use of the company's revolving credit facility.

Looking ahead, some financial experts believe the current results were largely expected and do not significantly change the company's intrinsic value. One analyst suggested that if the valuation changed significantly based on these numbers, it would be a pricing chase rather than a reflection of true value. For Anthropic to succeed, it must prove it can turn its massive research investments into a sustainable, high-profit business model.

What to watch next

The next few months will be critical as Anthropic and its advisors negotiate the final pricing for its public offering. Investors will be looking for signs of whether the company can stabilize its operating margins while continuing to scale its infrastructure. Any significant shift in the cost of short-term compute capacity could further impact these negotiations.

Additionally, the market will be watching for any new product launches that might drive a surge in revenue to offset the high infrastructure costs. If Anthropic can demonstrate that its frontier models are becoming more efficient to train and run, it may be easier to justify its high valuation. The balance between spending to stay ahead and maintaining profitability will be the central theme for the company's public debut.

Finally, keep an eye on the broader AI landscape to see if competitors face similar margin pressures. If the entire industry struggles with high compute costs, Anthropic's valuation might be viewed more favorably as a standard for the sector. Conversely, if competitors find cheaper ways to scale, Anthropic may face even more pressure to lower its IPO price.