Key Points
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Anthropic’s stock is expected to begin trading later this month.
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The artificial intelligence business is growing fast, but its losses are also significant.
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The market has been bearish on tech stocks of late, and that may put added pressure on the IPO.
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Chatbot maker and leading artificial intelligence (AI) company Anthropic plans to go public later this month, potentially at a higher valuation than even Space Exploration Technologies Corp (NASDAQ:SPCX), which was valued at around $1.8 trillion when it went public in June. Anthropic’s valuation might top $2 trillion out of the gate.
That high a valuation creates risk for investors, as it means expectations will be enormous right away. While the business is certainly growing fast, it’s still unprofitable and full of uncertainty. What’s worse is that the risk related to buying the IPO may be even higher now.
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Anthropic’s IPO comes at a time when the market is becoming cautious about tech
In recent weeks, there have been significant sell-offs taking place in the tech sector, as lofty expectations weigh on many high-profile companies. The State Street Technology Select Sector SDPR ETF has declined by about 13% over the past month as market apprehension about tech has grown more pronounced.
Anthropic’s ability to simply soar in value, and for it to command a high price simply because of a high growth rate or because it makes the popular Claude chatbot, may not be enough. The company’s growth rate has been exceptional, coming in at a whopping 1,200% during the first nine months of the year, totaling $33.2 billion. However, with a net loss of $104 billion during that stretch, which includes changes in fair value and non-operating items, investors may be more likely to think twice about the stock now than even a month or two ago, when there wasn’t so much of a spotlight on highly valued tech stocks.
Even SpaceX, which surpassed a $2 trillion valuation in its early trading days, has been falling of late to around its IPO price. It’s struggled to get back to its early highs, in large part because its valuation is incredibly high and its fundamentals don’t support such an elevated price.
Anthropic shouldn’t be anywhere near $2 trillion in market cap
Hype can have a significant impact on stocks, sending their valuations to inflated levels for long periods. But inevitably, they’ll come crashing down to reality.
That’s what I believe will happen with Anthropic. It might get close to $2 trillion in market cap when its IPO hits, but even if it does, it may ultimately fall significantly lower as the excitement fades, as more competition emerges, and the company’s results simply don’t look as impressive anymore, which can happen if the losses pile up and its growth rate slows down.
Anthropic isn’t an IPO I’d consider buying, as it was already a risky investment to consider before the recent softness in the tech sector. Now, it could be going public at a very inopportune time, when the market is growing bearish on tech stocks as a whole. This is why I believe investors are likely better off waiting rather than rushing to buy the new IPO.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
