Anthropic IPO: 3 Numbers Investors Should Focus on and 1 To Ignore

Anthropic's IPO could be the biggest in history. The leading AI lab is reportedly seeking a valuation of $2 trillion in its IPO, and the company just spilled the beans on all of its financial numbers, key metrics, risk factors, and other information that gives investors a clear view into the company and its prospects.

The document is more than 300 pages long, more than most investors are willing to digest, but there's some key information that you don't want to overlook. By now, some numbers, like quarterly revenue, have been widely reported, while others have been ignored. Let's take a look at a few nuggets that investors considering the stock will want to keep in mind, as well as one widely reported figure that investors should ignore.

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The numbers that show how Anthropic is shining

Unofficially, Anthropic reported revenue of $16.8 billion in the third quarter, up nearly 50% from the second quarter. Investors had learned that through media reports prior to the S-1.

However, two figures in the prospectus give investors a deeper sense of how fast the company is growing.

Customers with annual recurring revenue (ARR) above $100,000

Anthropic hasn't reported full results for the third quarter yet, as it hasn't finished the books, but the company did share that it closed the quarter with more than 11,900 customers with ARR above $100,000.

Reporting the number of customers at a given ARR level is common in the software-as-a-service sector, as investors believe these relationships are sticky, and the number of customers helps show how a business's revenue is diversified.

Anthropic's ability to grow to 11,900 customers at a minimum of $100,000 in ARR, up from just 1,500 at the end of last year, shows the company is rapidly gaining traction with a diverse range of enterprises, including smaller ones. The 11,900 compares favorably with Datadog, a leading SaaS company, which reported 4,720 customers at that level at the end of the second quarter.

Finally, it also shows how the company has diversified its revenue base over time. In the first three quarters of the year, its top five customers accounted for 25% of its revenue. It finished the third quarter with 250 customers with $10 million or more in ARR and 1,900 with $1 million or more in ARR. That indicates a company that is rapidly diversifying its customer base, mitigating the customer concentration risk.

Anthropic is getting more efficient

Anthropic needs to demonstrate scalability to investors, and its ratio of revenue to compute and infrastructure expenses has improved significantly in recent quarters. Compute and infrastructure is its biggest expense line item and is directly related to revenue, as generating tokens requires computing power. In the second quarter, revenue was 2.08 times compute and infrastructure expense, up from 1.4 in the first quarter and 0.57 in the quarter a year ago.

That indicates Anthropic has operating leverage and should become more profitable as it grows. It can more efficiently use its compute, add new products and new models, and charge customers more as its value improves. The cost of compute, on the other hand, is more fixed relative to usage.

It's free cash flow positive

For investors worried about the company's long-term health, this may be the most important fact in the S-1. Anthropic was free cash flow positive in the first half, with free cash flow of $3.5 billion.

The company spent just $482 million on property and equipment, showing it has an asset-light model, and a large generally accepted accounting principles (GAAP) net loss turned into operating cash flow of $3.9 billion after adjustments for fair value.

Anthropic also reported a positive adjusted operating income of $1.62 billion for the first half of the year.

The number to ignore

One number from Anthropic's S-1 that's been widely reported is its $80.7 billion GAAP net loss in the first half of the year. However, this number is almost entirely unrelated to operations, as it had a GAAP operating loss of $693 million in the first half of the year.

The net loss was driven by a $72.4 billion loss due primarily to the increasing value of its convertible notes because of the company's increasing valuation, and a similar $8.8 billion loss from "other expense" related to changes in value of convertible shares sold to Alphabet and Amazon. These are essentially accounting adjustments driven by Anthropic's rising valuation, and are best ignored.

Overall, Anthropic's S-1 shows the company is growing quickly, gaining operating leverage, and is profitable both on a free cash flow basis and on an accounting basis after adjustments.

Investors will have to consider the company's valuation when it goes public, but Anthropic looks a lot stronger than the recent panic about an AI bubble would have indicated. After looking at Anthropic's numbers, those fears seem overblown.

Jeremy Bowman has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Datadog. The Motley Fool has a disclosure policy.