There’s no question about AI’s revenue potential. The traction is quite literally like nothing we’ve seen before.
OpenAI surpassed $1.6 billion in ARR to close out 2023, and is probably far past $2B as I write this. Anthropic is also on a roll - forecasting to hit $850M in ARR by the close of 2024.
But if we turn our eyes away from the sun for a quick moment and peruse the rest of the P&L, you’ll find that these models aren’t cheap to run.
It begs the question: What’s the longer term profitability going to look like for AI companies? Will they be fighting gross margin headwinds in perpetuity? Will anything ever “drop to the bottom”?
What’s up there, anyways?
What’s in an AI company’s gross margin? Well, there’s the typical “cost of goods sold” - like customer support, hosting, and data feeds.
And then there’s the datacenter costs. A LOT of datacenter costs. Per the Information:
“Anthropic’s gross margin—gross profit as a percentage of revenue—was between 50% and 55% in December, according to two people with direct knowledge of the figures. That’s far lower than the average gross margin of 77% for cloud software stocks, according to Meritech Capital.”
And, depending on who you ask, it may not improve much over time: At least one major Anthropic shareholder expects the company’s long-term gross margin to be around 60%.
And that’s even before we throw in “the other stuff” that kinda sorta maybe should be contemplated:
“Notably, Anthropic’s gross margin doesn’t reflect the server costs of training AI models, which Anthropic includes in its research and development expenses. These costs can add up to as much as $100 million per model, according to Sam Altman, CEO of OpenAI.”
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