Clouded Judgement 10.30.26 - Dispelling the Myths of the Anthropic S-1
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SubscribedDispelling the Myths of the Anthropic S-1
Anthropic filed their S-1 this week. I wrote a quick recap the day of, but wanted to expand a bit here. As a quick disclaimer up front, Altimeter (where I work) is an investor in Anthropic. These views are my own, and not those of Altimeter.
I think there are plenty of good debates about the S-1 people should be having. Instead it seems like the vast majority of the takes online are heavily bias bulls affirming their positive bias and bears affirming their negative bias. With A LOT of ignorant / wrong surface level takes out there. Today I wanted to address a number of the just blatant wrong takes I saw (and will be as subjective as I can!).
As I see it, there are really only 3 questions that matter:
Can Anthropic stay at the frontier
Can anyone build a durable business around frontier models
How much does it cost to stay at the frontier, and will point 2 above allow point 3 to be achievable
But there are also a number of just bad / misinformed takes out there I wanted to address here. They are below
Take 1: Anthropic must be hiding something by not showing Q3 numbers in the S-1
I think this is just wrong. Anthropic Q3 ended less than 30 days ago. In order to put financials in a S-1 they need to be fully audited by a 3rd party. It simply takes time to get these audits done (and usually companies earlier in their public lifecycle take longer to get their audit done). It shouldn’t surprise anyone that Q3 numbers aren’t in this draft of the S-1. Some will point to the fact that the company reportedly had an investor day where Q3 financials were shared. In this case, I would strongly guess that the numbers shared were preliminary / unaudited. In my opinion, there is absolutely nothing shady about Q3 not showing up in this draft of the S-1.
We even have a couple recent examples of this. Cerebras went public in May (Q1 quarter ended in March) without Q1 financials (most recent quarter in final S-1 was the quarter ending December). Figma final S-1 was 7/31/25. The most recent quarter, Q2, ended June 30th. Q2 wasn’t in the S-1.
Take 2: Anthropic has >$100b of debt on the balance sheet
This one is important. While Anthropic ARR / Revenue figures seem to leak quite regularly, there wasn’t nearly the same amount of information on their cash balance. This matters, because many people wanted to know about the cash profile / profitability of the company. So heading to the balance sheet right after the S-1 was dropped made sense!
Looking at the balance sheet - the company has $134b of cash ($112b of cash and cash equivalents, $19b of short term investments, and $3b of restricted cash. They also have a line item of $109b for “convertible notes payable.” Is this debt? Let’s dig in, because it’s important. One of the reasons it’s important - the company also disclosed they have raised ~$141b of total capital. $141b of total capital raised and $134b of current cash implies they have only burned $7b in total across the lifetime of the company to get to the stage they are today, which would be incredible. But many people pushed back and said “Not true! They also raised $108b of debt on top of the $141b!”
However - this is just false. The company, according to the balance sheet, has not drawn down any debt. Here’s what the $108b of “convertible notes payable” on the balance sheet actually means. Long winded answer, but it’s important to understand.
Anthropic (like any startup) issues stock to raise capital early on. In most cases, that stock is preferred stock granted to institutional investor in return for capital. In other cases (again, exactly like how any other company would do it) capital is raised in convertible notes or SAFEs. These instruments don’t have a price, but instead peg a valuation (or a discount) to a future round. Discounts are the absolute norm. Company gets cash now, investor says to compensate me for giving you cash now price the security at a discount to the next round. Again, highly normal. If a convertible didn’t have a discount, there’s zero incentive for the investor to fund now. They’d just wait and fund the money when there was a known price in future. If company wants cash earlier, converts come with a discount. Doesn’t make sense to tell an investor “pay the same price now that a future investor will pay later when company is more de-risked”
Ok - so back to Anthropic. They also, like most companies, raised money in a combination of straight equity, convertible notes, SAFEs, etc. For some of the strategic investors (Amazon, Google, etc), they funded a lot of capital in convertible notes or SAFEs. Why not just straight equity? A few reasons! (This next part is more of my own speculation)
- public companies want to stay below certain ownership levels in other companies to avoid triggering “control” questions by the FTC. Notes / SAFEs don’t come with shares. They’re a promise for future shares. Large strategics can then stay under ownership thresholds in 3rd parties
- maybe Anthropic didn’t want to give governance to the strategics. Notes / SAFEs could allow the company to convert the equity into non voting stock vs voting stock
- maybe the strategics preferred converts! These securities would sit senior to preferred equity on a cap table. Anthropic was a risky early stage startup. Maybe the strategics wanted to be senior on the pref stack in case something went wrong. They’d be first to get their money back ahead of preferred investors if so
Ok - so Anthropic raised ~$11b of converts earlier in their life from Amazon / Google. When those dollars were raised, they were pegged with a valuation in line with the companies current valuation. However, the investors (Amazon / Google) didn’t receive the shares then. They received a promise for shares, pegged at the valuation at the time, in return for cash now. Over time, as more rounds are raised, those converts convert to actual equity on the cap table. About ~$5b has converted to equity, and $6b is outstanding.
How that $6b is accounted for is what is showing up on the balance sheet today. Again, those converts happened years ago, at a time the company was valued dramatically different from where it is today (meaning the convert price is very different, ie lower, than current valuation).
Because the shares haven’t been granted yet, but are promised, this shows up as a liability. But what is the dollar value of that liability and how does it show up on the balance sheet? Instead of showing up as the cost basis of the convert (ie shares promised x convert price) it shows up as shares promised x CURRENT price. So because the current price has gone up so much, the value of the convertible notes payable has gone up (because they’re marked to market).
Some people are saying “Ah! Look! They had to issues convertible shares at a MASSIVE discount to where the current value of the business is today! They raised $108b but let providers of debt convert their shares at a huge discount!” But again, this is just flat out wrong. The convertible notes were not just issued, they were issued years ago at the current valuations at the time.
So back to the original question - has the company really only raised $141b of capital? Yes! The S-1 doesn't explicitly give a breakdown of the $141b raised, but it reconciles to include the convertible notes: $128.6b of preferred proceeds + $11.3b of convert proceeds + ~$0.6b of SAFEs/common + ~$0.7b of pre-2023 rounds = ~$141b.
So - TLDR - saying the company has only burned ~$7b to get to ~$16.8b of Q3 revenue (what was reported in the news, not in the S-1 yet). This is quite impressive!
Take 3: The company had a net loss of $81b in the first half of the year
Technically this is true. If you look at the P&L, you will see an $81b net loss in the first six months of the year.
But - the “why” this is happening is the exact same reason as the point above. When the company added an increase in their liability on their balance sheet, they needed to recognize a corresponding reduction in equity value so the balance sheet ties (Assets = Equity + Liabilities). So as liabilities go up, equity needs to go down. And here, equity needs to go down by the same amount the liability went up (from Q1 to Q2)! This may get a bit too “financial” but the way to reduce the equity on the balance sheet is to decrease retained earnings. Retained earnings is just the running total of profits / losses the company has ever had. So the only way to reduce this is to run a loss through the income statement. And this loss being run through the income statement is exactly the net loss you see in the $81b!
Of that $81b loss, $72b comes from a mark to market change on Amazon’s convertible notes (which showed up as an increase in liability on the balance sheet). Amazon holds $6.2b of notes that convert into roughly 1.8b shares at $2–5 a share. As mentioned earlier, this i’s the cost of equity sold cheaply in 2023–24, recognized all at once because the company got more valuable.
And $9b comes from a mark-to-market change on forward commitments Anthropic made to sell Google and Amazon $15b of Series G-2 preferred at $259 a share (the January Series G price) as part of the March and April 2026 note purchase agreements. Series H priced at $589 weeks later, and GAAP books the discount as an expense.
Said another way - the $81b of “net loss” in the first 6 months of the year was ENTIRELY driven by a mark to market change of equity value of converts / notes from years ago fundraisings. If the company had issued equity instead of convertible notes back then, this “loss” wouldn’t have shown up.
All of this to say - it feels disingenuous to say “Ah! The company lost $80b in the first half of the year! What a bad business!” Quite the opposite - Anthropic actually had a positive 8% GAAP operating margin in Q2.
Now - my expectations are that this profitability actually turns negative in the coming quarters. Why? I think they were “accidentally” profitable. They haven’t ramped their compute capacity as they would have liked (I’m guessing), but at the same time they have monetized their existing fleet of compute far better than expected. They have shown themselves (and the world) that they can run a highly profitable business. Now they will ramp compute to meet future demand. And in this ramp period I’d expect profitability to decrease and turn negative. Let’s draw an analogy to SaaS companies. SaaS companies have forever said “Trust us, profitability will come once we get more mature and growth slows.” Anthropic is saying “hey look, we’re already profitable, now we’re going to go back into growth mode and burn money to expand our fleet of compute.”
Take 4: They’re only profitable because they issued huge equity packages that show up as non-cash expense
It’s no secret that the big labs are in a huge talent war and offer big equity packages.
When looking at FCF margins, they had a 21% FCF margin for the first 6 months of the year! BUT - FCF strips out SBC (the non cash expense). Now, even adding this back (ie subtracting it from FCF), Anthropic still had a positive 8% FCF margin. So any take saying “if they treated equity comp as cash comp they wouldn’t be profitable” is just lying.
There are many other debates happening around the company, but this post has already gotten quite long, so I’ll cut it off for now. The reality of the numbers are:
85% gross margins (H1 '26)
21% FCF margins (H1 '26)
8% FCF ex-SBC margins (H1 '26)
8% GAAP Operating Margins (Q2 '26)
$134b of cash today after raising $141b in total (and yes, this includes the converts)
Quarterly Reports Summary
Top 10 EV / NTM Revenue Multiples
Top 10 Weekly Share Price Movement
Update on Multiples
SaaS businesses are generally valued on a multiple of their revenue - in most cases the projected revenue for the next 12 months. Revenue multiples are a shorthand valuation framework. Given most software companies are not profitable, or not generating meaningful FCF, it’s the only metric to compare the entire industry against. Even a DCF is riddled with long term assumptions. The promise of SaaS is that growth in the early years leads to profits in the mature years. Multiples shown below are calculated by taking the Enterprise Value (market cap + debt - cash) / NTM revenue.
Overall Stats:
Overall Median: 5.0x
Top 5 Median: 33.8x
10Y: 4.9%
Bucketed by Growth. In the buckets below I consider high growth >22% projected NTM growth, mid growth 15%-22% and low growth <15%. I had to adjusted the cut off for “high growth.” If 22% feels a bit arbitrary, it’s because it is…I just picked a cutoff where there were ~10 companies that fit into the high growth bucket so the sample size was more statistically significant
High Growth Median: 18.7x
Mid Growth Median: 6.4x
Low Growth Median: 4.1x
EV / NTM Rev / NTM Growth
The below chart shows the EV / NTM revenue multiple divided by NTM consensus growth expectations. So a company trading at 20x NTM revenue that is projected to grow 100% would be trading at 0.2x. The goal of this graph is to show how relatively cheap / expensive each stock is relative to its growth expectations.
EV / NTM FCF
The line chart shows the median of all companies with a FCF multiple >0x and <100x. I created this subset to show companies where FCF is a relevant valuation metric.
Companies with negative NTM FCF are not listed on the chart
[individual company bar chart]
Scatter Plot of EV / NTM Rev Multiple vs NTM Rev Growth
How correlated is growth to valuation multiple?
Operating Metrics
Median NTM growth rate: 13%
Median LTM growth rate: 16%
Median Gross Margin: 76%
Median Operating Margin 4%
Median FCF Margin: 21%
Median Net Retention: 109%
Median CAC Payback: 31 months
Median S&M % Revenue: 34%
Median R&D % Revenue: 22%
Median G&A % Revenue: 13%
Comps Output
Rule of 40 shows rev growth + FCF margin (both LTM and NTM for growth + margins). FCF calculated as Cash Flow from Operations - Capital Expenditures
GM Adjusted Payback is calculated as: (Previous Q S&M) / (Net New ARR in Q x Gross Margin) x 12. It shows the number of months it takes for a SaaS business to pay back its fully burdened CAC on a gross profit basis. Most public companies don’t report net new ARR, so I’m taking an implied ARR metric (quarterly subscription revenue x 4). Net new ARR is simply the ARR of the current quarter, minus the ARR of the previous quarter. Companies that do not disclose subscription rev have been left out of the analysis and are listed as NA.
Sources used in this post include Bloomberg, Pitchbook and company filings
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