Nvidia, Alphabet, Microsoft, and Micron Are All Buying Anthropic’s IPO. Should You Buy Too?

Anthropic is set to be one of the biggest IPOs in history. The frontier AI lab revealed plans to sell 825 million shares of Class A stock at a share price between $70 and $78. At the high end of that range, it'll raise $64 billion and imply a fully diluted valuation of $1.4 trillion.

Separately, Anthropic is raising $26 billion in a private placement of the company's Class N shares, which carry no voting rights (but convert to Class A shares if sold to an unaffiliated buyer). That share class allows strategic business partners, including Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Micron Techology (NASDAQ:MU), and others, to invest in the company without conflict of interest. Indeed, all four companies are on the roster of investors in the private placement, buying shares at the same price as the IPO.

The question investors need to ask is: Are the big tech companies getting yet another deal on Anthropic shares? And if so, should you join them now that average investors finally have an opportunity to buy the stock?

Image source: Getty Images.

What happened to the $2 trillion IPO?

Just a few weeks ago, many analysts speculated that Anthropic could make its public debut with a $2 trillion valuation. That'd be a huge jump from the $965 billion valuation it garnered in its last fundraising round in May. Even so, the bottom of the company's IPO range represents an increase of about 30% in value in less than six months.

Anthropic is going public just as investors are expressing heightened concerns about artificial intelligence stocks. There's growing skepticism that the huge amounts being spent on new data centers will produce a meaningful return on investment. What's more, the midterm elections clearly show the public's opposition to building more data centers, with new officials who could slow the development of the so-called "AI factories."

Meanwhile, Anthropic disclosed commitments of nearly $900 billion in spending, about half of which will occur before the end of 2030. As such, the continued build-out of data centers is integral to Anthropic's growth. So, the current environment has weighed on its value.

Nonetheless, Anthropic is moving forward with its IPO despite the market pullback in AI investments. That's in contrast to rival OpenAI, which has delayed its public debut until at least next year.

Anthropic has clear demand for fresh capital, despite already holding $132 billion in cash and short-term investments on its balance sheet. Importantly, Anthropic is showing strong progress in converting its spending into revenue, with revenue reaching $17 billion last quarter and cash flow improving significantly.

It's no wonder, then, that Nvidia, Alphabet, Microsoft, Micron, and others are all willing to invest more money in Anthropic. The company is a major customer for each investor, so the capital will eventually come back as revenue. What's more, Anthropic is showing excellent progress in producing meaningful returns on capital and operating income.

Should you participate in the Anthropic IPO?

Anthropic reportedly plans to allocate about 20% of its IPO shares to retail investors, substantially more than the 5% or 10% typically allocated in an average IPO. And considering the total amount being raised, that's a huge amount for retail investors to absorb -- as much as $13 billion. So, if you want to buy Anthropic shares at the IPO price, you probably have a good chance of getting them.

However, IPO stocks have a spotty track record. More than half of all IPOs since 1975 have produced negative total returns relative to their offer price three years after their debut, according to data collected by Professor Jay Ritter. Large, VC-backed tech companies like Anthropic fare a bit better.

That negative bias for IPO performance stems from a handful of factors, not least of which is that most companies go public when the market is most receptive. However, Anthropic is now going public amid a more doubtful market, which has weighed on its valuation.

In other words, if Anthropic managed to go public at a $2 trillion valuation, it would be easy to recommend investors take a more wait-and-see approach with the IPO. With a valuation of $1.4 trillion or potentially less, the stock becomes much more interesting. With rapid revenue growth and progress on profitability, it may be worth buying a small allocation at the IPO price.

Adam Levy has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet, Micron Technology, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.