Anthropic's Q3 Results Are In — The Costs Are Exploding

basically SpaceXAI chatbot, their agent, that it wasn't working. And someone tweeted about this.

And then Elon responded to that tweet. I'm just quoting Elon Musk here, quote, the cost of serving GrokBot was unsustainably high relative to revenue, which basically encapsulates the entire concern about all of this. I mean, about OpenAI, about SpaceX, XAI, and also about Anthropic. I mean, if Elon Musk is telling us that that is what's happening, that basically the cost of training these things and then running these things is larger than the revenue. And as a result, he's having to shut parts of it down or dramatically pull back, at least on spending, it seems. I mean, it makes me think that Anthropik's headed for the same scenario. And now that we've seen the $900 billion, and we don't have exact clarity on how that's going to play out, but we can assume, based on what we do know, that it's going to be something like $100 billion at least per year over the next several years.

That's, by the way, very conservative, because we know that there is more than $400 billion in commitments that they're going to need to pay over the next four years. So it just makes me think that's probably where things are headed, but maybe Anthropic can turn

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We're back with PropG Markets. Earnings from Alphabet, Amazon, and Microsoft flooded in last week, and investors were not happy with the results. Despite a pop after reporting, Microsoft ended the week down 2%, and Amazon and Alphabet closed down 4% and 11%, respectively. The sell-off spread to the rest of tech as well. The Nasdaq 100 is now off more than 10% from its peak early last month, putting it in correction territory. All in all, the biggest AI and chip stocks have lost about $5 trillion in market value over the past month. So why are tech investors selling? Here to break it down, we're speaking with Deirdre Bosa, founder and host of Deirdre Bosa Live.

Deirdre, good to see you. So AI and chip stocks have lost about $5 trillion in market value since the beginning of October. This has been a pretty dreadful month and certainly week for practically every name in tech right now, even the companies that seem to report decent-ish earnings. I guess let's just start with your overall reaction. What is going on right now? It isn't like we haven't been here before. Earlier on in the generative AI cycle, markets have become anxious. They've started to think, OK, we are spending all of this money, hundreds of billions of dollars, trillions even on this AI buildout. But where is the return on investment, right? Like when is this AI spending going to pay off? And I think we're in another one of these moments. But at the same time, what's different this time than maybe what we saw a year ago or in the past is that the balance sheets of some of the healthiest, safest companies in the world are changing. So something that, you know, I look at and pay really close attention to is how much debt is being issued now, right? And this was sort of a neocloud thing that's been happening over the last few years. Neoclouds are, you know, the companies that are serving GPUs and

AI infrastructure to other companies. But of course, you have the hyperscalers as well, right? which is Amazon, Google, and Microsoft, they have typically had essentially fortresses as balance sheets, right? They have a huge amount of free cash flow and they've been able to fund their build-out. But something has changed this year. They've actually been tapping debt markets more. So just to put this in perspective, this is total AI-linked debt issuance. Numbers come from Bank of America. In 2025, it was nearly $400 billion. This year, it's going to be about $655 billion. and next year's forecast is going to be $1 trillion.

So this is just a huge change in how we're actually financing the build-out. It means that companies, not just the neoclouds, but some of our healthiest, biggest, safest companies are relying more on borrowing. So the timing matters more. This question of the payoff for all of the spending becomes all the more pressing because those debt payments, they are due whether or not the AI investments are paying off. So it leaves less room for mistakes, Ed, and it makes any kind of slowdown more painful. And something that you hear a ton of people in the industry say is that demand is enormous. We can't even satisfy the amount of demand we have and we're supply constrained.

But I think what that misses is the whole timing of this. And when you involve borrowing and the debt markets, that becomes a lot trickier, riskier, and timing matters all the more. And it seems as though, I mean, just looking at some of these names and Google, negative free cash flow, Amazon, negative free cash flow, Meta, negative free cash flow. I mean, the only hyperscaler that isn't negative on a free cash flow basis right now is Microsoft. But even for Microsoft, the number is going down. I mean, who knows where we'll be next year. it seems as though the only way this works is if everyone goes out and raises a shit ton of money, essentially. That's the way it's going to work. And so if you have, you said a trillion dollars in debt issuance, you've already got rates rising, you've got yields rising seemingly across the board, you've got the S&P lowering its credit rating outlook for Meta, which just happened this month. I mean, can they even raise that much? Is that becoming sort of the question at this point? I mean, that is, it's an interesting question, right? Because you look at the bottlenecks in AI and you think about power, right? That is a constraint. Chips are a constraint, but capital

is increasingly a constraint when you're trying to fund this enormous build-up. And you're right that only Microsoft has said. that it can sell fund next year at the same time. Last week, it priced in $25 billion of bonds. So even sort of the companies that have been holding out and saying that we're going to fund all of this ourselves are tapping debt markets. And you're right, when you bring in rising interest rates, this makes this all the more trickier. And I want to bring up something that people here talk about. It's this cone of uncertainty, right? It's very relevant when you think about the build out and when it's going to pay off. So you have to commit the money now, even though the further out you look, the less certain you are about demand, costs, and those returns. Borrowing really adds fixed payments to that uncertain future. And at the same time, Ed, when you talk about the companies that reported last week, their core businesses are slowing. So I don't want to say that this is just a debt and borrowing story that makes everything more urgent, but the core businesses you saw from Alphabet, right? A few years ago, we were talking about Alphabet cannibalizing itself, but it had AI overviews. It was going to figure out this

advertising piece. That actually hasn't happened yet. When you take a look at Amazon, it wants to be seen as sort of this AI company. But again, its core business isn't as healthy as investors would like it to look to say, OK, you can spend all of this money on the AI build out. So I think that that is also playing out. And that's what the market is looking at. That's why you're seeing these huge declines because investors are focused on the core businesses. But I will also give you the counterpoint. Do you want me to do that now? The counterpoint is just as interesting. There's this chart that I posted from the Financial Times and it pulls on, you know, other data sources, but it shows that this free cash flow squeeze shows that it's actually supposed to be temporary. So you can see that the hyperscalers, we'll talk about them for a moment, Amazon, Microsoft and Google, the hyperscalers that are spending the most on this buildout are eating into their free cash flow. As you mentioned, Ed, some of them is going to go negative. But by 2030, that is all supposed to come back. This is Wall Street consensus estimate. This is not my estimate.

Wall Street actually expects that Google, Amazon, Meta, and Microsoft are going to be generating more than $600 billion in combined free cash flow by 2030. So if you believe those numbers, This is like an insane buying opportunity. Yeah, and this seems to be part of the crazy thing about this moment in time. is that everything, the entire market is, and your expectations around this market are based on projections that are way out in the future that actually no one can say with any real certainty, which means massive upside risk and also massive downside risk. And the two are kind of pushing and pulling against each other.

I guess, you know, the thing that's so interesting, usually I don't actually care that much about market sentiment because usually the way we try to think about on this show is like, what are the fundamentals? How is the business actually looking? And then everything else is noise. But now that we're in this moment where in order to actually fund their own business goals, they have to depend on the capital markets and they have to go out and raise this money, which means that actually they're now dependent on sentiment in a lot of ways. They need investors to feel good about the AI story. Otherwise, they're not going to be able to go out and raise the amount of money that they actually need to raise over the next few years. So just as we start to wrap up here, you know, you cover a lot of this. You're actually in San Francisco. You're like interacting with a lot of these people. You just spoke with Jensen Huang the other week.

What is the sentiment like right now? I mean, we've had the euphoria stage. I can't tell if we're in Duma stage or if people are still feeling optimistic. Like, what is the sentiment in your view. It is not Doomer here in San Francisco. I mean, it remains sort of as bullish as ever. And what Jensen Huang focused on, what Gavin Baker focused on in that interview is demand. And that is undeniably still, you know, just at the earliest stages. What I would say, though, is I mean, that is a very that is a bit of a disconnect, right, from Wall Street. And I think that some will be able to withstand that better. NVIDIA is going to be OK right there at the center of the entire trade and you we can talk about as well you know gpu futures a way of insurance and the lifetime of these gpus is lasting a long time so there's a cohort of companies that are going to be okay we talked about a lot of them the mag 7 you know spacex as well is able to tap markets and raise more money companies will be able to do that i think the fear maybe are some of the neoclabs right and is that the thing that sort of breaks the ai trade so that may be something to look at a lot more closely because, Ed, I love that you look at the fundamentals. Me too. When you look

at the big tech fundamentals, which I think these are the numbers that people here in tech focus on, like these cloud numbers. were insane. AWS up nearly 40%, Azure nearly 50%, Google Cloud over 100%. That is sort of indication that the demand is there and it's paying off, but Wall Street is really focused on some of those other core businesses that have paid for the build-out. Deirdre Bosa is founder and host of Deirdre Bosa Live, which I understand is officially launching next week. Could you tell us a little bit about it, Deirdre? What's the launch going to look like? What's the timing? Yeah, so we actually launch our daily show on Monday, November 9th. We're going to be live at 1 p.m. Pacific, 4 p.m. Eastern, right after the markets close. Every day I'm sitting actually in the office space, not the studio. It's still under construction. Final touches are being put on just across from me. So really excited. And Ed, hope to have you on to chat with me there as well. I would love to, and I'll be tuning in.

Thank you so much, Deirdre. Thanks for having me. it is election day in america and voters are casting their votes in what could be a blockbuster election for the democrats but before we are able to break down the results of the midterms let's take a moment to check in on what will probably be the most important topic on many voters minds and that topic is the economy how is it doing joining us to discuss this where the American economy stands ahead of the midterms. We're speaking with Mark Zandi, chief economist at Moody's Analytics. Mark, thanks for joining us on Prof G Markets. So half of registered voters tell Gallup, they did a poll, that the economy is extremely important to their vote. I'm not surprised by this. This seems to me to be the most important thing heading into these midterms. So I just wanted to get your update. How is the economy doing halfway through Trump 2.0.

Well, Ed, I'll tell you, I'm surprised only half. I would have thought it would be much more than that. Me too. Because I think that's top of mind for sure for many people when they go going to the polls. Well, the economy, it depends on which economy you're talking about. I mean, if you're talking about the AI economy and you're in that ecosystem, benefiting from all the investment that's going on, or more likely if you own stocks and AI companies, you know, the economy feels pretty good. You're a lot wealthier than you were. not too long ago. In fact, the total value of publicly traded stocks in the U.S. has doubled in just the past four years since Chad GPT was put on the planet. So the wealthy, the folks that own the stocks, they're doing fine. No problem. Life is good and they're outspending. For the rest of Americans, not so much. Many Americans don't own stock. Most Americans don't own any stock of any consequence. And of course, many Americans, about a third, don't even own their own home, they're struggling. Their after-inflation income is at best holding its own, maybe even declining, and their purchasing power is evaporating. And this goes to the higher inflation, this goes

to higher interest rates as a result of things like the Iran War. So their economy is not so good. When you add it all up, you know, it looks okay. The economy is growing, but, you know, it's a very fragile growth. And again, it depends on whose economy you're talking about. Yeah, I mean, we've seen income inflation adjusted falling over the past six months uh prices obviously continuing to rise you said uh in may you said quote in my 36 years as a professional economist the stock market has never been more disjointed from the economy um which gets at what you've just explained there this difference between the ai economy the stock market economy and I guess we could call it the real economy, the workers' economy. To what extent do you think that disconnect is going to play a role? Do you think that any Americans say, okay, well, my wages are down, my grocery prices are up, gas prices are up, but I have a more valuable stock portfolio, and I'm happy about that? Is that something that you think that voters are actually going to think heading into these elections? Well, I think three-fourths of Americans don't own stocks of any consequence, and many don't own their own home. So what's going on with

regard to AI stocks means nothing. So the stock market can go up, it can go down, it can go around. It doesn't matter. What matters for them is what they're feeling, and that is, are my wages, you know, what I'm getting paid, keeping pace with the higher prices for the things that I'm buying. And that's real income, real so-called real wages, after-inflation wages. And there, you know, the picture is pretty bleak. I mean, real wages are going down. Inflation is faster than the rate of- growth in wages. So people's purchasing power, their ability to buy things is declining. And they feel that. They know that. They sense it. And that's what makes them upset. And that's why consumer sentiment surveys are as weak as they are. That's why the polling numbers are the way they are. That's why the Republicans are getting blamed for what's going on. For that three quarters of Americans, the financial situation is pretty tenuous. And then you throw into the mix, more recently, the hot run-up in interest rates. I mean, interest rates had been pretty low until the war. And now the fixed mortgage rate, which is kind of the benchmark rate that most people think about when they think about rates, what they have to pay to get a mortgage,

it was below 6% before the war started. It's now well above 7%. And of course, that just makes housing, homeownership completely unaffordable. And that's just part of it. It's higher credit card interest rates, higher interest rates on home equity lines of credit, consumer finance loans. So again, for most Americans who don't own AI stocks, it's a pretty vexed time. They got a job, you know, okay, but, you know, their wages are just not keeping up with the pace of inflation. Their real standard of living is on the decline. I'm just going to read you a few quotes by President Trump that CNN collected. So this was in 2024. Trump said, quote, energy is going to bring us back. That means we're going to get gasoline below $2 a gallon. Gas was $3.33 at the time. It's now $4.22 nationally. He also said that we will quote, slash electricity prices by half within 12 months at a maximum 18 months.

Electric prices have risen around 14% since he began in office. He said, as you point out, He said, we're going to, quote, get mortgage rates back down to, we think, 3%, maybe even lower than that. He said that in September 2024, mortgage rates have risen to more than 7.2%. I mean, I could go on. We could talk about manufacturing jobs. We could talk about balancing the budget and the deficit exploding. There are so many promises that were not kept. I guess that happens a lot in politics, but what seems striking to me is the extent to which all of these problems seem to be almost principally his fault. Like, you look at gas prices, it's hard to say that that is a result of anything.

anything other than his geopolitical decisions in launching a war on Iran. Same with, you know, consumer prices. I mean, that's largely due to the gas prices, but also because of the tariffs. I mean, do you think that there is anything else out there on which we can place the blame when it comes to economic problems in America? Or is it genuinely the president's fault this time? Well, it's policy writ large. I mean, the Iran war is the most obvious, most immediate. I mean, inflation and interest rates have risen pretty much since the day the war started back on February 28th. But there's other policies. I mean, there's the tariffs. We're not talking about the tariffs, but the tariffs, same kind of damage to the economy.

It raises inflation. It's a tax on American consumers, raises inflation through higher prices, which weakens economic growth. So same kind of dynamic is playing as a result of that. And, of course, the very heavy-handed immigration policy, same result, you know, weakens economic growth because many companies that rely on immigrant workers just can't get them, can't find those workers. and they raise their prices for the things that they've produced because they need to bring demand back down consistent with the amount they can supply with reduced labor force. So again, another policy that's causing the same kind of dynamic to play out, weaker economic growth in higher inflation.

I mean, I think the whole narrative about the economy would be very different today if not for AI. I mean, if not for the boom in AI investment that we're observing that's come on very quickly and the boom surge in AI stock prices, the narrative around the economy would be really pretty bleak. It'd be pretty dark. We'd be talking about recession. And it does go back largely to economic policy. Now, there's all kinds of other things going on, other dynamics, but at the end of the day, I totally am sympathetic to what you're saying. It's policy that's at the root of what's going on uh before we end your economic scorecard um or your if you had to give a grade to this economy heading into the midterms what would it be and then to close out uh i'd love to hear if you have any predictions for the for this election you know that's my that's my profession is predictions uh and i do sympathize with the president it He got his forecast wrong, but, you know, forecasting is a pretty intrepid affair.

You know, I give the economy a B because, you know, it's A++ when it comes to the AI economy. For the non-AI economy, it's probably a D. So you take the average of the two, B-, let's say, somewhere in there. But that doesn't do justice to the reality of what people are feeling. They're either in the A++ world or they're in the D world. And there's many more Americans in the D world than the A++ world, if that makes any sense at all. You know, I am an economist, and I, you know, look at things like election results through the prism of the economy. And, you know, it's the economy stupid, going all the way back to James Carville and the Clinton election.

And I think that still holds. And the economy for most Americans, not for all, but for most, the majority of Americans, it's pretty tough. And it hasn't gotten any better. It's getting worse. And people are connecting the dots back to things like the Iran war and the tariffs. They know that that's behind a lot of what we're observing. So that would strongly argue that, you know, we'll see a change in government here on the other side of the election. Certainly the House and very possibly the Senate. Mark Zandi is chief economist at Moody's Analytics. Mark, we will see and we will check back in.

Appreciate your time. Stay tuned. Okay, that's it for today. Tune in tomorrow to hear our coverage of Apple's earnings with Patrick McGee. Later on this week, we will also be unpacking the midterm results with Catherine Rampell and also Matt Iglesias, so don't miss it. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Chalon, Kristen O'Donoghue and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow.