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00:00We start with the arrival of the mega IPO, led by SpaceX, with Anthropic and OpenAI right behind.
00:07What does starting out with a $1 trillion market cap mean for the markets and those of us investing in
00:13them?
00:13Stephen Radner is chairman and CEO of Willett Advisors,
00:16which invests the personal and philanthropic assets of our founder and majority owner, Michael Bloomberg.
00:22Steve, this week we have had the IPO of SpaceX, long awaited.
00:27And it's not the only one that appears to be going out at a trillion dollars or more.
00:33We also have Anthropic and we have OpenAI.
00:37There's a lot of talk about this in the financial press.
00:41Is it that big a deal?
00:42Oh, yeah. This is extraordinary.
00:44I've been in this business for a pretty long time,
00:47back in the day when a few hundred million dollars of market cap and an IPO of $50 million was
00:52reasonable.
00:53And now look where we are.
00:56We've never had companies of this kind of valuation on the day they go public, go public.
01:01We've never had this amount of capital being raised in an IPO.
01:05It's extraordinary.
01:06And perhaps it's a natural part of the evolution of capital markets, but it is still extraordinary.
01:11It's also, I would say, relatively concentrated, as much of the stock market has been, actually, in big tech.
01:17I mean, it's all tech-related, AI-related.
01:21Is that a problem, potentially?
01:23People certainly worry about it, the fact that you have such a high percentage of the stock market
01:27in a relatively small number of 7 to 10 companies, depending on how you count.
01:31I've seen charts showing that if you look back at the dot-com bubble, if you look back at 1929,
01:36at some of the other corrections, there was a similar phenomenon.
01:39I'm not sure why those two things necessarily should go together.
01:43But certainly, the world is in love with tech at the moment.
01:46And whether that will prove justified or not, time will tell.
01:49Are the normal rules of finance suspended when it comes to these?
01:53Because, I mean, if you look at things like valuations, I mean, they're really extraordinary.
01:57I mean, for example, what they're talking about with SpaceX is really, you're saying,
02:00like, 95 times they're trailing revenue, not earnings, revenue.
02:07Yeah, I think I absolutely would agree with that.
02:10But I would also say that back in the dot-com bubble, we had companies going public,
02:13I think, with no revenue or some de minimis amount of revenue.
02:17Again, much smaller valuations, much smaller offering sizes.
02:20But, yes, the valuations very much depend on what you believe is going to happen in the future
02:26as opposed to what already happened or what's happening at the moment.
02:28When I talk about SpaceX and Anthropic and OpenAI, they're very different in one respect,
02:35which is profitability.
02:36SpaceX actually has been losing money, making money in some parts, losing money in others.
02:41And OpenAI has yet to make money.
02:44Anthropic actually is making money.
02:46Should that make a difference to investors as they look at these three stocks?
02:50Not necessarily.
02:51I mean, certainly making money now is better than making money somewhere down the road.
02:55But an investment decision is essentially looking at the present value of future cash flows.
03:00And so if you believe the future cash flows will be there, then the fact that it doesn't make money
03:05now
03:05is not the end of the world.
03:07Obviously, people who invest in private venture capital kinds of things or growth kinds of things
03:12are often investing in companies that make no money at that point.
03:15Some of them don't even have a business at that point.
03:17But you're believing what's going to happen in the future.
03:20The problem is that the further down the road the cash flows are going to occur, the positive cash flows,
03:26the more uncertainty, obviously, there is around them.
03:28The more you get into questions of what's the right discount rate
03:30and how do you really value cash flows that are five, six, seven years out.
03:34As an investor looking at these stocks, we have SpaceX, which is a fairly complex creation.
03:41I mean, you've got Space Launch, you've got AI, you've got all sorts of things in there,
03:47as opposed to, for example, Anthropic, which is a cleaner play.
03:50Does that make SpaceX more attractive or less attractive?
03:52I think you could go either way.
03:54I think there are plenty of companies with one line of business that have done fine,
03:58and there are other companies with multiple lines of business that have done fine.
04:01If you look at SpaceX, the launch business is an excellent business.
04:05Musk has done a fantastic job of essentially winning that race, so to speak.
04:10But it's a small business, and it's never going to be a trillion-dollar valuation kind of business.
04:15If you look at the Starlink business, he's clearly done a great job with that as well.
04:20But, again, it's not going to fully justify probably the valuation.
04:25And so you have to believe that out there there's something else.
04:29There's an AI business, whether it's data centers in space or Grok actually becoming more viable than it seems to
04:37be so far,
04:37or something like that.
04:38We can't know right now, but as you look at this as an investor, do you wonder where the upside
04:44is?
04:44I mean, as you know so well, companies are taking a lot longer to go public in general,
04:49which means that a lot more of the upside may be before it goes public,
04:53and a lot of the growth may be behind you as you go public.
04:56Is there a risk in something like a SpaceX that actually the good part's already been realized?
05:01Absolutely. Absolutely.
05:02There's lots of research that's been done on IPOs.
05:06Smaller IPOs of smaller companies tend to not perform as well in the fullness of time post-IPO.
05:12Bigger companies, obviously, again, have no experience with something of this size, so who knows?
05:17But you remember when Facebook now met it when public, it was a really messy IPO.
05:22The stock traded down. People were bailing out.
05:24And now look at it.
05:26Google had this weird IPO with their Dutch, reverse Dutch auction, whatever you want to call it thing.
05:31Also a little complicated. Eventually, look where Google is now.
05:34But then there's plenty of tombstones out there for the ones, I mean, graveyard kind of tombstones,
05:39not celebratory tombstones for the ones that didn't work out so well.
05:43So there's concentration in the big tech, AI area.
05:47There's also a concentration in the person of Elon Musk.
05:50He has 85 percent, something like that, the voting control.
05:53He also is the CEO, the CTO, and the chairman.
05:56What are the risks involved in that as an investor?
05:59Well, there's definitely what we call key man risk.
06:02This company is a unique creation of Elon Musk.
06:05I think he's got a good team.
06:07Gwynne Shotwell has a great reputation.
06:09He doesn't suffer fools, obviously, so only people who really can produce stay with him.
06:15But nonetheless, it's hard to imagine many other people who could have achieved something of this extraordinary magnitude.
06:21So I would separate the voting control issue, which we can talk more about,
06:25from Elon, the person, actually calling the shots, making the important decisions.
06:29That, I think, is critically important.
06:31The voting thing, I think, is a different kettle of fish.
06:33What do three IPOs, as we're looking at right now, mean for the rest of the marketplace and other investors?
06:39I mean, first of all, could there be a slipstream effect, where there are other ancillary businesses that serve these
06:45businesses
06:45that could be brought along in the slipstream?
06:47Depends how they go.
06:49If they go well, then you will see more of them.
06:51It's not completely a coincidence, I don't think, that you haven't seen that many IPOs of these kinds of companies,
06:57and they've been staying private for longer.
06:59Part of it is the IPO market has not been really robust for a good number of years now.
07:03I think it's finally coming out of that.
07:05And partly, I think people have not really wanted the hassle of being a public company and like being private.
07:11Now, when you need the amounts of capital that these companies need, you really, at some point, have no choice.
07:16And so I think if this goes well, these three, or most of them,
07:20I think you will see more of them come out of the venture growth world and into the public markets.
07:25One of the things that was accommodated is the circular nature of some of the transactions going on among these
07:30companies.
07:30I mean, specifically with SpaceX, they have a deal with Anthropic, right,
07:34where Anthropic's paying them a lot of money, I think like $1.250.000 a month, but with a 90
07:41-day out.
07:42But there are a lot of other circularities among the ownership and the relationships among these companies.
07:47Is that a risk?
07:48And people go back and they use analogies, again, the dot-com era,
07:52when people were doing these contracts for dark fiber, but they were never going to need it,
07:56they were never going to use it, it was never going to get built, whatever.
07:59I don't think it's that much of a risk here, because fundamentally, what we do know this far
08:03is that AI is going to be a game-changer.
08:05When you look at the pace of revenue growth for the providers of the large language models,
08:12I don't think I've ever in my career seen businesses exceed a set of projections by as much as these
08:17companies have.
08:17More often than not, businesses fall a bit short of your projections, whatever.
08:21This has been extraordinary.
08:23And the usage, the adoption rate, is unlike any technology, I believe, in history,
08:27in terms of how fast it's being used and how much it's being used by people.
08:31So there's a real business at the bottom of this.
08:33If Musk wants to use some of his excess data capacity to generate some revenue,
08:38in the meantime, while he tries to build Grok into a viable LLM, I don't have a problem with that.
08:44You just have to, as an investor looks at that, you have to understand what it is you're doing,
08:49how long the contracts are, what the repeatability is, and so forth.
08:52The dramatic growth that you describe also comes with what I would say is dramatic capital investment.
08:57I mean, the CapEx is extraordinary.
08:59When does it need to pay off?
09:00I mean, at some point, you put all that capital in, you need to get a return on that capital,
09:05and given the amount of capital going in, it's got to be a lot of return.
09:08Sure.
09:09Anthropic is already profitable, and so we can kind of see what this can look like.
09:15Yeah, I'm not going to argue about that.
09:17It's an extraordinary amount of capital, and you expect extraordinary returns.
09:20But I do believe that AI is a game-changer unlike anything I've seen in my lifetime
09:26in terms of what the impact it could have on business and how business is conducted
09:30and how we use technology and things like that.
09:32But it must be siphoning capital off from other possible uses of the capital.
09:36I mean, is it starving other businesses that could be using capital to good effect?
09:41As a matter of corporate finance theory, sure.
09:44If you use more of something, the price of it should go up.
09:46But you can't find that in the marketplace, I don't think, in terms of where corporate bonds are trading,
09:52the ability of these companies to raise capital, and they've mostly been raising equity,
09:57it should be noted as well.
09:58One of the things we're learning from this period is that the capital markets are deeper
10:02and more robust and more fulsome than we probably ever would have imagined.
10:07Is this one and done?
10:08Will there ever be any series of IPOs like this again at this level of magnitude?
10:13We've never seen it before.
10:14No, we've never seen it before.
10:15But, again, I think if you looked at other periods where we had very robust IPO activity,
10:20I don't know, when Alibaba went public and the $20 billion IPO,
10:24we might have said, well, we're not going to see that again.
10:26Or Saudi Aramco or General Motors, the other two big $20-ish billion ones,
10:32we might have said, oh, that's like kind of once in a lifetime.
10:34And now we're at $75 billion.
10:36So I would never say never.
10:38I think the numbers just get larger over time.
10:40I would not have predicted this.
10:41I'm not going to predict the next one will be a $150 billion IPO,
10:45but I wouldn't say never.
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