‘Catastrophically vulnerable’: Burry flags risks in the Anthropic prospectus
Anthropic’s complex relationships with its computing capacity providers leave the entire system vulnerable to even a slight market reversal, Burry warns / Photo: favoritesphoto / Shutterstock.com
The circular financing system Anthropic detailed in its prospectus may work while the AI market is growing, but it increases vulnerability if that growth stops, warns investor Michael Burry, famously portrayed in “The Big Short.” Writing on his Cassandra Unchained blog, he describes a risk that extends well beyond Anthropic itself. Burry compares the start-up’s relationships with its suppliers to arrangements in the late 1990s, when equipment manufacturers financed the internet and telecom infrastructure buildout.
People keep making the same mistakes with every new new thing.
Take or pay
For Burry, the most important disclosure in Anthropic’s prospectus, which runs to more than 300 pages, concerns the company’s financial commitments. The filing details agreements to purchase computing capacity and lease equipment total $537 billion. Including a deal with Google that has yet to be finalized and separate agreements with SpaceXAI could add almost $270 billion.
With the not-yet-finalized TPU deal and the SpaceXAI deal included, the commitments are more than 20 times trailing 12-month sales and about 12 times revenue at the current annual run-rate.
Meanwhile, Anthropic’s top-line growth is slowing, Burry points out. Revenue grew 132% quarter over quarter in the first quarter and 144% in the second, before slowing to 45% in the third quarter to $16.8-16.9 billion. Anthropic disclosed the results to investors shortly before publishing its prospectus, as Bloomberg and the Financial Times reported. In August and September, revenue grew 3-7% a month, on Burry’s numbers based on data from consultancies Syz and SemiAnalysis.
Anthropic’s infrastructure spending, meanwhile, is growing faster than revenue: it rose 78% in the third quarter, from $5.6 billion to $9.9 billion, Burry estimates using data from the prospectus.
In such circumstances, a company could cut its purchases of computing capacity. For Anthropic, however, that is not an option: its contracts with hyperscalers are on a take-or-pay basis, Burry points out. This means Anthropic must pay for the agreed capacity regardless of actual usage, making up any shortfall in cash if consumption falls below the contracted level. The take-or-pay provisions were included because Anthropic sought more capacity than its suppliers were willing to provide. According to the prospectus, its agreement with Microsoft contains these obligations through May 2033, its agreement with Google through July of the same year, and its agreement with Amazon through April 2036.
Tied together
Complicating matters is a circular financing arrangement in which major tech companies serve simultaneously as Anthropic’s sources of funding, suppliers of computing capacity, and sales channels.
Anthropic’s relationships with Amazon and Google offer the clearest example. Together, the hyperscalers have invested about $41 billion in the AI developer while also signing contracts to supply it with $110 billion and $114.5 billion of computing capacity, respectively. The same companies sell Claude to customers through their cloud marketplaces, charging Anthropic a fee. As a result, the hyperscalers collect almost half of Anthropic’s revenue, 48% in the first half, and account for 58% of its receivables, Burry notes.
Just remember, the reason this is so complex is because too much debt is needed, and it must be unloaded from the balance sheets of those involved. When bulls scream that this time is different because of the cash flow at the hyperscalers, remember that the cash flow is not near enough, and the Byzantine nature of this deal and the Anthropic relationships bear that out.
Anthropic’s complex relationships extend beyond the hyperscalers. Broadcom, for example, leases equipment with TPU chips to the start-up and brings in outside investors to finance it. In return, those investors receive rights to a portion of Anthropic’s future lease payments. Smaller suppliers, including Lambda and Nscale, also use their contracts with Anthropic to secure bank loans to purchase equipment.
Anthropic states in its prospectus that a default under certain commercial agreements could trigger cross-default provisions under its credit agreement and certain convertible notes, Burry writes. That would allow creditors to demand early repayment of substantially all of Anthropic’s debt.
The risk is just that. While some may see all the circularity and connectedness as security on the way up, and that is not wrong, it does leave the entire organism catastrophically vulnerable either on a pause or on the way down.
