Anthropic Rents Compute – Here’s Why That Matters
Inside Today's Issue
Essay: Anthropic’s Teleportation Machine
Big Tech Reports Earnings
EQT’s Latest Acquisition
Microsoft’s Layoff Plan
Chart Of The Day… Tobacco Outperforms Tech
Today’s Mailbag
Editor’s Note: A Nobel Prize winner warns that a divisive policy backed by both parties “will make a few people much richer and most people poorer.”
Porter agrees – and he believes the split could accelerate the moment the votes are counted on November 3.
This Thursday, in his emergency election broadcast, he’ll show you his #1 money move to make before election day.
Remember Jeff Bezos’ teleportation machine?
In his 2004 letter to Amazon (AMZN) shareholders (published in the spring of 2005), Bezos asked readers to imagine a teleportation machine that moves people instantly from place to place. As you’d imagine, demand for the machine was virtually endless. But the machines were expensive to build – they cost $160 million each. And they only lasted four years. Even so, revenue poured in. Each trip cost $1,000 and each machine could handle 100,000 trips a year, producing $100 million of revenue! After energy, materials, and labor, each machine produced $50 million of cash a year.
The accounting looked fine: a 10% profit margin after depreciation. The machine will earn back its cost in 3.2 years. But it wears out in four.
Over its life, each dollar of machine returned $1.25 of cash, most of it near the end. Discounted at a 12% cost of capital, each dollar invested loses five cents. Bezos' verdict:
There is no growth rate at which it makes sense to invest initial or subsequent capital to operate the business.
In other words, when you’re evaluating rapidly growing technology businesses that require huge capital investments, investors must focus on the cost of capital and the depreciation charges. Lately, because of inflation, the cost of capital has been increasing. The benchmark U.S. interest rate (the 10-year U.S. Treasury bond yield) has moved from around 2% five years ago to around 5% today.
As we showed you recently, these factors – massive depreciation costs and rising capital costs – have us questioning CoreWeave’s (CRWV) business model. CoreWeave is building data centers full of brand-new Nvidia (NVDA) chips. It rents them to artificial-intelligence (“AI”) companies. Currently, it owns $46.7 billion of equipment and brought in revenue at a rate of $10.3 billion annually in Q2: 22 cents of revenue per dollar of equipment. After operating costs, that's 13 cents of cash a year. CoreWeave needs 7.7 years to earn back its cost, but it depreciates its chips in only six years. Each dollar of equipment destroys 46 cents of value at a 12% cost of capital, based on its current results.
