What a Wobbly AI Trade Could Mean for Anthropic’s IPO

Key Takeaways

• Strategists and money managers say Anthropic, which could IPO as early as next month, likely won’t have trouble pulling off a record-breaking listing, despite market concerns about AI.
• Tech stocks struggled in recent months as investors debated whether future AI demand will justify the sector’s massive data center investments.
• Recent tech stock offerings, like Meta’s $25 billion equity raise this week, suggest demand for AI stocks remains robust.

On Monday, Anthropic publicly filed its S-1 registration statement, starting the countdown on what’s expected to be one of the largest initial public offerings on record. Investors have anxiously awaited a peek under the hood of one of America’s leading artificial intelligence labs ever since Anthropic submitted IPO paperwork to the Securities and Exchange Commission in early June.

The filing comes at a precarious time for the AI trade. “The enthusiasm for AI stocks has definitely waned over the last few months,” says John Belton, portfolio manager at Gabelli Funds. Some headwinds stem from factors pressuring the entire stock market, like accelerating inflation and rising interest rates.

What’s Been Weighing on AI Stocks?

The market has unique concerns about AI. Reports of “rogue” agents, including an OpenAI model that hacked into open-source AI platform Hugging Face, stoked fears of a pullback in data center equipment spending. Markets grew wary of the data center buildout’s ballooning costs as hyperscalers like Alphabet GOOG and Meta Platforms META, some of the world’s most profitable companies, sold debt and equity to pay those expenses.

The concern among investors is that companies will build more data center capacity than future demand can support, depressing prices and hamstringing their ability to recoup the hundreds of billions they’re funneling into capital expenditures annually.

The AI rally’s strength became a headwind in its own right. Some tech stocks “have had huge multi-year runs,” says Belton. “Risk sentiment has been cooling, and investors have been looking at taking some profits.”

Anthropic’s leaked revenue figures may have even had a hand in the AI rally’s hiccup. Belton suspects Anthropic’s revenue growth—sales more than doubled sequentially in both the first and second quarters of this year—was a key driver of the second quarter’s tech stock surge. But the firm’s sequential growth slowed to about 50% in the third quarter. “These fears of [inadequate] return on capex spending have resurfaced, given the slowdown at Anthropic,” says Belton.

Some money managers are taking steps to protect their clients’ portfolios as market-wide and AI-specific risks mount. Brian Regan, senior portfolio manager at Wealth Enhancement Group, tweaked his firm’s portfolios last month to be more defensive, citing rising interest rates and concerns about the sustainability of AI-driven earnings growth. “The stocks that are doing really well tend to be very cyclical, historically,” he says, “and with a cyclical boom, there usually at some time comes a cyclical bust.”

While concerns about rising interest rates and cyclical earnings have pressured some stocks lately, “the core of the AI trade is still intact,” says David Stubbs, chief investment strategist at AlphaCore Wealth Advisory. “The capex cycle will continue to roll,” he says, as adoption rises and compute demand continues to exceed supply. That said, “we’re finding ways to diversify within the AI trade or looking to diversify away from the AI trade, just because our clients have a lot of exposure,” says Stubbs.

Anthropic’s Prospectus May Juice AI Bullishness

Despite increasingly cautious positioning, most money managers are confident Anthropic can stage a successful IPO. “There’s enough hype around this that they’re going to raise every penny they need,” says Regan. “I won’t be a buyer, but I’m guessing clients are going to be coming to me asking me to buy it,” he says.

Gabelli Funds’ Belton says much of the commentary in recent earnings reports has given investors reason to view AI spending more positively than in recent months. “SpaceX is talking about how they’re getting payback periods on AI infrastructure investments between six and 12 months,” while Meta’s advertising revenue is taking off. “That’s a $300 billion business that’s growing close to 30% now, and that acceleration is due to AI,” Belton says.

Strategists say Anthropic’s prospectus has, to some extent, renewed Wall Street’s AI optimism. “[The S-1] was better than expected,” says Malik Ahmed Khan, senior technology equity analyst at Morningstar. He points to corporate America’s rapid uptake of Anthropic’s Claude. The number of firms paying Anthropic $100,000 annually increased to 11,900 by the end of the third quarter from about 950 in the prior year. “Adoption of AI continues to be very much in its early innings, which tells you that they have a long runway for growth,” says Khan.

Anthropic’s IPO prospectus has breathed fresh life into the ailing AI trade. The Morningstar US Artificial Intelligence Index rose 2.0% on Monday following Anthropic’s filing, and another 2.5% on Tuesday. Semiconductor stocks hammered by concerns about slower AI spending have rebounded sharply, led by Advanced Micro Devices AMD, up more than 8%, and Broadcom AVGO, up 6%.

Khan says the market reaction suggests investors aren’t getting ahead of themselves: “The big question mark is that a lot of the compute agreements they’ve signed haven’t come online yet, which means that the profitability we’re seeing may be more of a mirage.” Anthropic has entered computing contracts valued at about $855 billion, most of which is due regardless of how much the company makes, according to PitchBook. “Investors recognize that,” which has tempered their enthusiasm, according to Khan.

Can the Market Absorb More AI Stocks?

Some investors fear the ballooning supply of AI stocks could more than offset the tailwinds from improving investor sentiment. According to Ben Inker and John Pease, asset allocation leads at GMO, “each 1% increase in equity supply has historically cut market value by roughly 4% over the next year.” They estimate that the end of SpaceX lockups, a torrent of new equity issued by hyperscalers, and IPOs by Anthropic and OpenAI could increase equity supply by 5% or more in the next year.

Thus far, though, the market has easily absorbed new stock. “SpaceX seemed to go just fine in June,” says Belton, despite concerns that the record-breaking debut would divert capital from other stocks. SpaceX’s listing came just weeks after Alphabet raised $45 billion in an oversubscribed offering.

More recently, the $22.5 billion equity raise Meta announced last week was upsized to $25.0 billion on Monday. Ultimately, the offering was five times oversubscribed. “They could have raised $125 billion,” says Khan, “so if Anthropic tries to raise $100 billion, I don’t think they’re going to have any issue.”