CROSSPOST: NOAH SMITH: Anthropic’s Moat Is Claude

The conventional wisdom in the circles that I travel in is that, should Anthropic undertake an IPO at anything close to any of the valuation numbers currently being whispered about, it will be massively overpriced relative to true fundamentals. Now comes Noah Smith to say “maybe”. And he constructs an “exhilarating and terrifying” “huge, teetering tower of assumptions” to get to a strong bull case even given that MAMLM model services have no network effect, little brand loyalty, low switching casts, and hungry and aggressive rivals who have engineers who can catch up fast via their own work or via distilling yours. What do I think? I am a relative bear. There may well not be even is a low-probability chance of enough future supergrowth to justify the risks in buying in at anything like the IPO price. If there is, it really depends on whether the secret sauce that has fueled Anthropic’s hypergrowth over the past year and a half is that its models aresmarterin useful-general-intelligence (or super-intelligence!) sense. And I cannot evaluate that, since I do not have a good understanding of what that secret sauce is: https://www.noahpinion.blog/p/anthropics-moat-is-claude http://noahpinion.blog Anthropicrecently filed for IPO. At an estimated $1.5 to$2 trillion, it will be one of the biggest IPOs of all time, rivaling SpaceX, and possibly the biggest. For reference, Facebook’s valuation when it had its blockbuster IPO in 2012 was $104 billion, and Google’s valuation in 2004 was$23 billion. Anthropic will instantly become one of the world’s most valuable companies — Google itself is now worth $3.4 trillion, and Nvidia and Apple are both worth around$5 trillion. This naturally has a lot of people asking: What’s the upside to buying Anthropic? Even if it grew to be as valuable as Apple or Nvidia — in other words, if it became one of the most valuable companies on planet Earth — that would only be a multiple of 2 to 2.5. But if Anthropic stumbles, that lofty valuation could come tumbling down. There are certainlylotsof reasons Anthropic could stumble. Demand for AI couldtake longer to materializethan people think, perhaps because companies have trouble integrating AI into their existing business models. The U.S. government could decide that Claude’s hacking capabilities represent a national security threat — especially after the recentwave of AI-assisted cyberattacks— and decide to regulate, appropriate, or otherwise restrain the company (thespat with the Department of Warmight represent the beginnings of that conflict). One company (SpaceX?) might end up monopolizing all of the compute, squeezing Anthropic’s profits. Competition from OpenAI and Google, or Chinese models, might result in a competitive race to the bottom thatforces down Anthropic’s margins. And so on. In order to balance all that uncertainty and risk on the downside, Anthropic needs to have huge upside. It needs a way that it could be worth a lotmorethan $2 trillion in the years to come. For comparison, if you bought Google when it IPO’d, your investment would have gone up by over 130 times by today. To equal that performance, Anthropic would have to be worth$200 to $260 trillion by the late 2040s. That’s almost half of the total wealth that exists in the entire world today. For Facebook, the number is around 16x, meaning Anthropic would have to be worth$32 trillion by the early 2040s — still an impressive performance, considering that that’s more than six times the value of the most valuable company in 2026. How could Anthropic manage that kind of growth? One possibility is that the world economyitselfwill grow at a very rapid pace, thanks to AI. Some AI researchers think that growth could soon accelerate to fantastically high levels. Butmost economists bet against that, and even most AI industry insiders expect the growth speedup to bemuch more modest. Even 7% nominal growth — 4% real growth plus 3% inflation — would only make the economy about 2.75x larger by 2041, and 4.43x larger by 2048. So in order to have the upside of a Facebook-like outcome — let alone a Google-like outcome — Anthropic probably can’t just ride a wave of economic growth.1It’ll need tocapture a greater fraction of the valuethat our economy produces. So far, the company has been doing exactly that — and at anextremelyrapid rate. Itsrevenue has grown fasterthan any company of similar size in all of history. And despite this explosive growth, the company is now making an operating profit: Businesses usually have to spend more money to make more money at the outset, but Anthropic’s Claude Code is a product that sells itself — relative to just one year ago, the company is making more than 3 times as many dollars of revenue for each dollar that it spends on compute: AsSemiAnalysis writes, this is “the most efficient scaling of a business in the history of capitalism”.Jeffrey Bussgang has a good breakdownof Anthropic’s recent IPO filing, and it’s full of amazing details — incredible user retention, a broadening base of customers, and so on. And Anthropic is selling a product whose adoption rate is still very low. As Aaron Levie points out, most big companies are still spending only a pittance on AI, and could afford to spend a lot more: And yet for this growth to continue, Anthropic must do more than simply make great products. It will need to stave off the competition for decades on end. It will, in Wall Street jargon, need a “moat”. When I was teaching business economics to MBAs at Stony Brook, I spent lots of time on the question of why companies make profit. This might sound like a stupid question, especially if you’ve been conditioned to think that there’s some kind of magic force called “capitalism” that companies can use to extract money from people and hand it to their shareholders. But in a world of perfect competition, companies should keep trying to undersell each other untiltheir profit goes to zero— or at least, until it goes to a level where companies are just able to pay for their investments. Even if one company has a huge share of the market, the simple threat that new companies might be able to enter the market and compete with them should force them to keep their prices low in order to maintain their market share. And in fact, lots of industriesdowork like this. Agriculture, in the absence of farm subsidies or other significant government support, is the most famous example. Solar power is another — energy provides huge value to the world, but solar is so undifferentiated a product that solar producers never end up making big margins.2Airlines are a third example. Consumers (and workers) benefit from these industries, but shareholders don’t end up making huge returns. In order to make profits (or “excess profits” above and beyond the cost of investment), companies generally needsome sort of a “moat”— abarrier to entrythat reduces the threat of competition. This could be agovernment-sponsored monopoly— cronyism, or intellectual property. It could be anetwork effect— the natural tendency of everyone to be on the same social network or use the same electric power grid. It could be something as simple asbrand loyalty— maybe everyone thinks Louis Vuitton bags are worth paying money for because of the name, or maybe everyone is just very used to using Microsoft Excel and doesn’t want to switch. These are all reasons why some companies make high profit margins. There are probably more. Investors will tell you that if you want to assess how valuable you think a company is going to be, you should try to evaluate the strength of its moat — in fact, the term “moat” as slang for barriers to entry was coined by Warren Buffett. Ever since AI companies like Anthropic and OpenAI burst on the scene, I’ve beenhearing smart people arguethat they have no moat. After all, unlike famously profitable software companies like Facebook or Google, it’s not clear that AI has a network effect — whether I should use Claude