Anthropic’s third quarter results mean IPO math and history are not on its side, analysts say

Anthropic's third quarter financial results have raised concerns among analysts about the company's prospects for a successful IPO. Revenue growth has slowed and expenses are rising at a faster pace compared to prior quarters. Several analysts believe that the IPO market and historical data are not favorable for Anthropic to achieve strong returns for investors.

Institutional investors are reportedly advocating for the company and its advisors to price the shares at the lower end of the $1.5 trillion to $2 trillion valuation range they are seeking. A valuation above $1.41 trillion would require investors to pay more than $40 for every dollar of revenue generated by Anthropic in the past year, a price level not achieved by most IPOs in the past four decades.

To justify a valuation north of $1.4 trillion, Anthropic would need to achieve annual after-tax profits of at least $100 billion, which only a handful of companies have ever accomplished. The company's compute and infrastructure expenses increased by about 77% to $9.9 billion in the third quarter, with approximately $5 billion coming from short-term capacity purchases.

Anthropic typically orders compute 12 to 18 months ahead, but when demand exceeds what it secured, it must buy more expensive short-term capacity. This has put upward pressure on the company's adjusted operating margin, which declined from 19% to 15% in the quarter, mainly due to these short-term costs. While the company's gross margin remains healthy at 85%, the pressure on adjusted operating margins is growing as revenue struggles to keep up with rising compute costs.

Experts suggest that Anthropic's liquidity, including its $131.8 billion cash reserve, could help fund further investments in AI research, but higher compute costs may also increase borrowing costs for the company, further impacting its margins.