Learning from SpaceX: how to navigate the noise an Anthropic IPO could bring

Speculation that AI giant Anthropic will join the stock market has been reinvigorated with reports that it’s preparing for a $2 trillion public listing in October.

Based on the mooted numbers it'd be a ‘record breaking’ IPO, already taking the mantle from Elon Musk’s SpaceX after its $1.7 trillion market debut in June.

The two firms are very different businesses, with SpaceX involved in the commercialisation of, as its name suggests, space, meanwhile Anthropic is best known for creating the widely used AI assistant Claude, but they share a crossover in terms of market story and theme.

They're both deeply intertwined in the AI innovation narrative which has dominated equity markets in recent years, and are both being forecast to deliver massive potential returns, if their long-term visions become reality.

The SpaceX IPO, because of its size and the various debates around its valuation, not to mention changes to index rules, created a frenzy around the event which at times may have felt overwhelming.

While it’s not confirmed that Anthropic is going to IPO, there are some lessons we can take from the SpaceX experience to prepare ourselves for the potential information overload coming our way.

Read about how you might be investing in SpaceX without realising it in our recent article.

There will be a lot of noise

As tired as we may have become with the phrase ‘unprecedented’, when an event truly meets that criteria it’ll naturally generate a lot of conversation.

In stock markets, ‘noise’ is something investors are frequently told to shut their ears to. This ‘noise’ is anything that is unhelpful when making thoughtful, considered investment decisions.

Much like when you’re trying to pick what you want to order in a restaurant but there’s a table with kids crying and throwing food behind you, the waiters and chefs are shouting and you just panic order the carbonara before you remember that you hate eggs.

But it’s easier said than done. Engaging with active conversations about markets and news in general is a worthwhile endeavour so simply knowing that a lot of information, noise and coverage will likely be coming out can help it be less of a distraction when it arrives.

Being mindful of FOMO

With noise often comes fears that you’re missing out on something; that other people have understood the potential opportunity better or know something that you don’t.

History is littered with retrospective stories from people who say their biggest mistake was not getting into a stock sooner.

Retired Aberdeen fund manager Harry Nimmo had a story from when he was a young analyst at what was then Standard Life and he recommended to his boss to take a meeting with a little known US tech firm he thought was promising. Nimmo was due to be away on holiday at the time and when he came back he found out that his boss had never taken the meeting. The company in question? Microsoft.

The less well-remembered side of the coin is when people rushed into investments they didn’t fully understand and not because they couldn’t, just because they didn’t have all the information that they needed yet, and it went wrong.

Martin Schmalz, professor of finance, economics and real estate at the University of Oxford, wrote just after SpaceX went public: “In general IPOs are super volatile. So…the question is whether the retail investors are particularly well positioned to stomach that volatility – or whether they should.”

“Research shows the most robust behavioural feature of people is that they underestimate risk. They are more convinced about their position.”

This isn’t to say that no-one made an informed decision about investing in SpaceX back in June, rather that it’s human nature to want to tell ourselves that things will work out.

So if Anthropic comes around and it feels like everyone is doing ‘something’, it’s important to focus on making the right call for you and ignore what others are doing.

What we do know for certain about Anthropic today

While we can’t know much about Anthropic’s internal workings and state of its financial affairs, there are things we can know for sure.

In the risk spectrum of assets, equities/stocks rank at the top end ahead of bonds and cash, in descending order.

If your investment goals don’t suit taking on a higher risk asset, then you don’t have to retroactively make your portfolio work for Anthropic just because it’s popular.

How you can get invested pre-IPO

If you do like the sound of Anthropic but aren’t sure about how much you should invest, you can currently delegate that call to an active fund manager.

Four investment trusts are already invested in Anthropic as a private company, because their investment mandate and trust structure allows them to do so.

Baillie Gifford US Growth (USA), RIT Capital Partners (RCP), Schiehallion Fund (MNTN) and Scottish Mortgage (SMT) have between 1.7% and 6.6% of their total assets in Dario Amodei’s company.

Going by the valuation from the May funding round, Winterflood analysts calculated that a revaluation to $2 trillion would provide a material uplift to net asset value for all four trusts.

Getting exposure via a trust means that you’re not only invested in Anthropic’s pre-IPO growth, but you’re diversified as well, as all the above hold around 30-50 other names, so you don’t have to put all your conviction on just one stock.

A value checklist

One of the main head spinners people had to deal with during the SpaceX IPO was just how big the numbers being thrown around were. Wrapping your mind around how a stock is worth $1.7 trillion isn’t easy, especially when the discourse was so divided on whether or not that was justified.

If Anthropic goes for a similar and potentially even higher valuation, we can assume that those debates will rear their heads again.

But again, we can learn a thing or two from last time. Here are three key numbers to watch.

Metrics for IPOs and fast-growing companies

Companies early in their life cycle do not always generate profits and positive cash flows, which means traditional stock market valuation metrics like the price-to-earnings ratio are redundant.

Price-to-sales and EV to sales

Most companies which come to market generate sales (although the dotcom era was known for companies coming to market with just a business plan and no revenue).

Price-to-sales ratio measures market value or share price relative to historic or expected annual sales. For example, SpaceX came to the market in June with a price-to-sales ratio of 91 times.

This is much higher than the two-to-three times sales which Meta and Alphabet traded at when they became publicly quoted companies.

When comparing companies which have different funding structures it is better to use enterprise value to sales. Enterprise value (EV) is the total value of a company encompassing its debt, other liabilities and cash. You can think of this as the amount a buyer would have to pay to take over another company.

Higher EV to sales ratios would usually imply an expectation for faster revenue growth.

EV to EBITDA

EBITDA is a rough substitute for cash flow used by private equity firms. It can be abused but essentially it is operating cash flow before accounting for movements in working capital, interest payments and capital expenditures.

Even though SpaceX is unprofitable it did generate positive EBITDA of $3.5 billion in the quarter just reported.

Again, higher EV to EBITDA would suggest expectations for higher growth, everything else being equal, or higher EBITDA margins (EBITDA as a percentage of sales).

40% rule

This is calculated by adding revenue growth to EBITDA margin (against sales). Originally used for software companies it is now used more broadly in cloud computing and AI.

The idea is that companies must meet the hurdle of 40% to look interesting from a value perspective.

It’s really a trade-off between fast-growing companies which are not as profitable at the EBITDA level and more mature firms where top line growth has slowed but margins have expanded as they reach scale.