With a valuation of $965 billion based on its last funding round, Anthropic -- which develops the Claude family of artificial intelligence (AI) models -- is the largest AI lab operator in the world. The company's recent decision to confidentially file an S-1 with the Securities and Exchange Commission in advance of an initial public offering (IPO) marks a significant milestone in the evolution of the AI industry.
Anthropic's ambitions to go public arrive alongside other major technology listings, most notably SpaceX and Cerebras. In today's stock market, where companies attached to the themes of AI and data center infrastructure command premium valuations, Anthropic's S-1 casts a spotlight on how investors can gain exposure to the near-trillion-dollar unicorn.
I have no doubt that Anthropic's IPO will generate its share of excitement. However, I believe that more compelling investment cases lie with Amazon (AMZN 2.45%) and Alphabet (GOOGL 0.69%) (GOOG 0.76%).
Image source: The Motley Fool.
The timing of Anthropic's S-1 filing is interesting
Anthropic's S-1 filing was well aligned with the broader market mood. With SpaceX moving toward its IPO this month, investors are increasingly presented with compelling opportunities across the next generation of AI applications.
However, the current environment also quietly underscores the risks of investing in standalone AI model developers. The business of training and operating generative models requires loads of capital, and there's fierce competition from OpenAI and others.
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In such a setting, pure-play developers such as Anthropic are vulnerable to concentrated execution risk. This could make its stock susceptible to volatility once it debuts.
While the hype around IPOs is natural, there are real possibilities that the company's valuation could take a sharp tumble if it falls to meet investors' growth expectations. In my view, established infrastructure and platform leaders such as Amazon and Alphabet are more attractive bets.
How could Amazon and Alphabet benefit from the Anthropic IPO?
Amazon and Alphabet are both positioned to benefit from whatever success Anthropic enjoys through a combination of equity investments and strategic cloud partnerships.
Since 2023, Amazon has invested $13 billion in Anthropic. Similarly, Alphabet has committed to invest as much as $40 billion contingent on the start-up achieving certain performance milestones. These ownership stakes provide the opportunity for direct equity benefits to Amazon and Alphabet.
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Beyond ownership, both hyperscalers have lucrative operational ties with Anthropic. Specifically, Anthropic relies heavily on Amazon Web Services (AWS) as its primary cloud provider for training and inference. In addition, it has expanded its use of Google Cloud's Tensor Processing Units -- application-specific integrated circuits (ASICs) that Alphabet designed specifically for AI workloads.
As Anthropic scales up, both AWS and the Google Cloud Platform are positioned to benefit from increased user consumption, deployment of ASICs, and the release of new enterprise services. Investors in Amazon and Alphabet will quietly enjoy leveraged exposure to Anthropic's post-IPO progress through direct appreciation of the companies' equity stakes in the start-up and their recurring cloud revenue growth.
Diversification is key in any successful portfolio
I think the clearest reason Amazon and Alphabet are better buys than the Anthropic IPO boils down to differences in their business structures. Even after its meteoric rise, Anthropic remains a highly advanced large language model developer. This leaves the company exposed to the potential commoditization of such models amid intense rivalry from other labs. By contrast, both Amazon and Alphabet have built diversified AI ecosystems.
Amazon is integrating Anthropic's models into Amazon Bedrock, enhancing the entire AWS platform while simultaneously powering its e-commerce, advertising, logistics, and consumer device ambitions through AI. And the company is further developing its proprietary Trainium and Inferentia chips in ways that complement the Anthropic partnership.
Similarly, Alphabet layers its Anthropic investment within Google Cloud and its own Gemini models -- fueling improvements across Google Search and YouTube, and moving Waymo's autonomous-driving ambitions forward.
Profitability is equally important. Many key players in the AI realm are burning huge amounts of cash to build infrastructure. Amazon and Alphabet, however, generate consistent profits and cash flow. This financial strength gives them the flexibility to fund their ambitious AI efforts and the durability to weather any market cycle.
Ultimately, Anthropic's IPO plans are part of an exciting narrative that highlights the maturation of AI. But for investors seeking the best risk-adjusted way to play Anthropic, Amazon and Alphabet stand out as the clearest winners in my view.
Each provides some exposure to Anthropic's potential successes, but also delivers a level of proven profitability that pure-play infrastructure names will struggle to match at scale. In an AI market that loves growth stories, owning the key enablers and background integrators might prove to be the more rewarding strategy in the long run.
