Ed Zitron: Anthropic and OpenAI Shouldn't IPO

Ed Zitron, founder and CEO of EZ Primary Research, has voiced strong reservations about the potential IPOs of leading AI companies such as Anthropic and OpenAI. Speaking on Bloomberg Businessweek Daily, Zitron articulated his belief that these companies, despite their significant advancements in artificial intelligence, are not yet in a financial position to justify public market offerings.

The Case Against AI IPOs

Zitron's primary concern revolves around the profitability and sustainability of these AI ventures. He argues that the vast sums of money being poured into AI development, particularly for large language models, are not currently translating into tangible returns that would satisfy public market investors. Zitron stated, "I think people are conflating a semiconductor rally with an underlying successful business. Which doesn't really exist." He elaborated that companies like Anthropic have questionable current revenue growth, and the underlying business model for many AI developers is not yet proven. "What this has led to is suddenly businesses are going, 'Oh, how much money are we spending? How much money are we spending on AI?'" Zitron observed, highlighting a growing skepticism about the return on investment (ROI) for AI initiatives.

The Unproven ROI of AI

A central theme of Zitron's argument is the difficulty in measuring the actual return on investment for AI tasks. He pointed out that while companies are investing heavily, the tangible benefits and revenue generation are often not clearly quantifiable. "You've got a thing where you can't measure the costs, and you can't measure the return on investment," Zitron explained. He drew a parallel to the dot-com bubble, suggesting that a similar speculative fervor is driving current AI investments, without the necessary underlying business fundamentals.

The full discussion can be found on Bloomberg Podcast's YouTube channel.

Zitron further criticized the comparison often made between AI companies and semiconductor giants like Nvidia (NASDAQ:NVDA). While acknowledging the immense growth and success of semiconductor firms, he stressed that their business models are fundamentally different. "We haven't had a new AI platform that has been the creator of profit that we've seen in the past," Zitron stated. He suggested that companies like Alphabet Inc. (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT), which are heavily investing in AI, are doing so to maintain their existing market positions rather than from a place of proven new revenue streams generated solely by AI.

Transparency and Sustainability Concerns

The lack of transparency in the financial reporting of these AI companies is another major red flag for Zitron. He noted that companies like OpenAI have reportedly incurred significant losses, with some reports suggesting over $200 million in losses in the first half of 2024, and that their ongoing operational costs are substantial. Zitron expressed concern that investors are being drawn into a narrative without a clear understanding of the underlying economics. "We don't have access to their books, so we don't know how much they're actually spending," he said. He contrasted this with established companies that have a track record of profitability and clear business models.

Zitron specifically called out the significant capital expenditure required for AI, particularly in the form of GPUs and data center infrastructure. He estimated that it takes 6 to 12 months to install just a few quarters' worth of GPUs, highlighting the long lead times and massive investment required. "They're investing in things that are going to be expensive for the next 10 years," he commented, suggesting that the current market valuations do not adequately reflect these long-term costs and uncertainties.

The Risk for Retail Investors

Zitron warned that the current AI hype could lead to a scenario where retail investors are left holding the bag, similar to what happened during the dot-com bust. He believes that the market is currently being driven by a narrative of inevitable AI dominance, which may not materialize as expected. "The market is irrationally investing in something that I think is destructive," Zitron stated, pointing to the fact that many companies are being valued based on future potential rather than current performance. He emphasized that while some companies will undoubtedly succeed, many will fail to deliver on their promises, leading to significant losses for investors who are caught up in the frenzy.

Ultimately, Zitron's assessment is a call for caution and a more grounded approach to evaluating the AI industry. He believes that before companies like Anthropic and OpenAI can be considered viable IPO candidates, they need to demonstrate a clear path to profitability and a sustainable business model that is not solely reliant on speculative investment and unproven technology.