Markets are in turmoil following Anthropic’s latest financial data. The frontier AI lab generated $16.8 billion in revenue last quarter, up 45% from the previous quarter and more than 250% from the first quarter of 2026. These are stunning growth numbers for a company this size, but investors worry growth may not be fast enough to justify the company’s $2-trillion target valuation.
These concerns raise questions about the AI market as a whole. And since the AI investment boom underpins GDP growth, the stock market, and employment, these questions matter to everyone, not just to AI investors.
Can frontier labs like Anthropic and OpenAI continue to grow rapidly? Their valuations assume rapid growth long into the future. There are many reasons why this growth might not materialize.
The first is competition from free, open-weight models from China, the U.S., and Europe. Such models are becoming very good at a variety of tasks. Even though they remain consistently behind the frontier, the frontier is now far enough ahead that being behind it still covers most tasks that workers and consumers perform every day.
The second reason is competition from more established companies like Google and Meta. These companies are also developing frontier AI models and have existing businesses that generate profit and cash flow, which lets them keep investing long term, while Anthropic and OpenAI struggle to go public and raise more cash.
The third reason to doubt Anthropic and OpenAI’s continued growth is that they compete with each other. So far, the two companies’ models have been neck and neck. Whenever one pulls ahead, the other stages a comeback and reaches roughly the same level of performance. This creates healthy competition that pressures each company‘s ability to expand and maintain profit margins.
Even if demand for Anthropic and OpenAI’s products expands indefinitely, there is a fourth reason their current growth projections might not materialize. The supply of data centers, computing resources, and energy required to meet demand might not grow fast enough to keep up. Currently, this supply is both growing faster than expected and bumping against political and financial constraints.
The bear case for Anthropic and OpenAI is easy to understand and backed by contemporary evidence. Many also hope these companies fail, which makes the bear case seem even more compelling (people often confuse what they think would happen with what they wish would happen).
In contrast, the bull case rests on more abstract advantages. It is also backed by evidence, but making sense of it requires analysis.
OpenAI and Anthropic’s first advantage is focus. The two companies do not run the world’s largest search engine or social media site, nor do they have an existing cloud or enterprise business. All they aspire to do is develop the world’s absolute best AI. This type of focus can go a long way. We can expect these companies to be the best at what they focus on. So far, that’s exactly what happened: ChatGPT wasn't developed by Meta or Google, and the first product to catch up was developed by Anthropic rather than Big Tech.
A second and related advantage is talent density. Both Anthropic and OpenAI remain the most desirable destination for top AI researchers and related top talent. The fact that both Meta and Google are willing to pay more to hire and acquire such talent is proof. Combine that talent with a clear mission and focus, and you have another reason to expect these smaller companies to remain the best in the world at what they do.
The third and related advantage is organizational structure and flexibility. OpenAI and Anthropic are small companies with flat organizational structures and short histories. This enables them to move quickly, change direction, and deliver sharp experiences. Anthropic recently reported that its team is merging code 10 times more frequently than they did a year earlier, thanks to internal AI tools. The company’s size and structure let it capture more of those productivity gains.
Contrast this with Google: its AI models are not far behind OpenAI and Anthropic’s in pure capability; in some fields, Google’s capabilities are ahead. But Google’s AI offering is a mess, with multiple brands, logins, overlapping products, and confusing offerings. As my friend Ben likes to say, Google is “shipping the org chart,” and its products reflect the company’s structure and history more than what customers actually want.
Meta, the other giant company reaching for the AI frontier, is doing a bit better. But only because its founder is willing to constantly slash his own organization, make very risky gambles, and accept constant ridicule and hate from financial analysts and the public at large. This type of leadership is as good as you can expect to find in a giant company. Still, Zuckerberg’s heroic effort enables Meta to almost keep up with Anthropic and OpenAI’s top models. Importantly, Meta can continue to grow its own business without developing the world’s absolute best AI model; by definition, it means the company is less focused on that specific goal.
Being small, focused, and young also gives Anthropic and OpenAI a regulatory advantage. Regulators have already tried to break up Meta, Google, Microsoft, and other tech giants. This already limits these companies’ ability to acquire AI companies, and regulators would likely push back if and when one of these companies becomes more dominant. Meanwhile, letting AI leadership concentrate in a couple of newer companies is a more appealing political proposition, though it would face plenty of pushback on its own.
The fifth advantage might be the most controversial. OpenAI and Anthropic might ultimately be better positioned to fund frontier models. Yes, Meta and Google have much larger businesses and a constant flow of operating cash flow they can funnel into future investments. But the AI boom is so large, and competition is so intense, that even Meta and Google’s internal cash flows are no longer enough. Both companies are already raising money from outside lenders and investors. So far, their existing “stable” business makes that easier.
But at some point, piling on more debt or diluting existing shareholders might threaten these companies’ overall financial health. A startup like OpenAI or Anthropic is a crazy gamble by definition, and its investors and leadership are far more comfortable piling on debt and dilution than Meta’s or Google’s boards and shareholders ever will be. Being private also means that OpenAI and Anthropic don’t have to worry about short-term shareholder sentiments. And even if they went public, their investors would be, by definition, less risk-averse than those who hold blue-chip stocks like Meta and Google. Focus also plays into this matter: As the AI boom becomes a dangerous game of chicken, Meta and Google simply have too much to lose.
To be clear, I think Meta and Google will be fine. My only point is that they might not be willing or even able to continue to do what it takes to remain at the absolute cutting edge of AI development. Anthropic and OpenAI have a clear shot at offering the world’s absolute best AI models for years to come.
The elephant in the room is that even if they do, it won’t matter. As mentioned at the beginning, most human tasks are already served quite well by free, open-weight models. The share and quality of these tasks will only increase over the coming months and years.
When free models become good enough, why should we expect much demand to continue paying a premium for the absolute best?
This is Anthropic and OpenAI’s final and most important advantage: There is a huge market for the absolute best AI models. A lot of that market has been created by AI itself.
Consider cyber defense. It’s one field where users would pay a premium for an AI model that is six months (or six minutes) ahead of the competition. In a world of AI swarms picking apart corporate and government systems, organizations would need a comparable swarm of AI defenders to constantly probe and patch things up. Given that our basic human needs now depend on systems vulnerable to cyberattacks, it makes sense to spend a considerable sliver of GDP on cyber defense alone.
Anthropic and OpenAI can build a trillion-dollar business around cyber and general defense, even if they don’t capture any other market.
Would I invest in OpenAI or Anthropic at their current valuations? I wouldn't, because the risk-reward asymmetry isn't enticing enough. But I would not write them off either. They have a good chance of remaining ahead of everyone else in terms of absolute AI capabilities. And if they do, they can build massive businesses even if everyone else succeeds around them.
Have a great weekend. On Sunday, I will mail out the Signals I am watching this week.