Hello, Reader.

Single-number roulette is one of the worst bets you can make in a casino.

The player picks a number between 1 and 36 and hopes the little white ball drops into that slot. If it does, the house pays you 35-to-1. If it doesn’t, the chip disappears into the casino’s pocket.

Those odds sound almost fair… until you notice the two green slots labeled “0” and “00.” Those numbers belong to the house. If the ball lands on a house slot, the casino sweeps everything off the table for themselves, except any random bet a player might have made on one of those single numbers. Those two extra slots give the house an advantage on every spin. The longer you play, the harder that advantage is to overcome.

It’s why novelist Mario Puzo, of The Godfather fame, once said, “If you are looking to cheat the house or beat it legitimately, forget about roulette. It’s basically a sucker’s game.”

Better luck next time!

I bring this up because next month, Wall Street plans to spin the wheel on one of the most-watched roulette bets in its history.

That’s when Anthropic, the maker of the Claude AI models, is expected to go public. Bankers have floated price tags at around $1.5 trillion, with some calling for valuations as high as $2 trillion. That would make Anthropic one of the most valuable companies on Earth starting on Day 1.

Millions of investors will place a chip on that high-risk, but I would caution against doing the same. Because there’s a lesson from the dot-com boom that most investors have forgotten: Even when you correctly identify the next revolutionary company, the price you pay can make it a terrible investment.

Today, I’ll show you what happened to 48 of the hottest internet stocks of that era, why even the next Amazon.com Inc. (AMZN) might be a lousy investment at Anthropic’s rumored valuation, and where I’d look for better opportunities as AI reshapes the market.

One Winner Out of 48

In December 2000, three professors at the Wharton School examined the fortunes of 48 publicly traded e-commerce companies that had captured investors’ imaginations during the dot-com boom.

The results were grim.

• Six had filed for bankruptcy…
• Fifteen were trading below $1…
• Amazon was down 90% from its peak…
• And only one company was trading above its IPO price: 1-800-contacts.

That’s 1 winner out of 48. Suddenly, picking the right number on a roulette wheel doesn’t sound quite so difficult.

It gets even worse if you look at the private dot-com firms. In a separate analysis at Wharton, a researcher attempted to estimate the number of all reasonably large e-commerce companies operating during the internet bubble. He counted around 1,100.

Of roughly 1,100 e-commerce businesses, only 20 remained by 2015. And two companies — Amazon and eBay Inc. (EBAY) — had come to dominate the industry.

The internet changed the world, just as its most enthusiastic promoters had predicted. But the overwhelming majority of companies chasing that opportunity disappeared along the way.

“But This One Is Amazon”

I know what many of you are thinking: Anthropic isn’t Pets.com. Its revenue hit $16.8 billion in the third quarter, up from almost nothing two years ago. Surely, it’s the Amazon of this cycle, not one of the other hundreds of flops.

Perhaps. Anthropic has a legitimate shot at becoming one of the dominant technology companies of the next several decades. But even if it does, that doesn’t tell us whether its stock will be a good investment. For that, we need to consider the price.

And here’s where the Amazon comparison gets interesting.

Most people forget that Amazon during the dot-com boom was not particularly expensive by today’s standards. Even after adjusting for inflation, the online retailer’s market value topped out at $36 billion in December 1999. That’s about as much today as Dassault Systèmes SE (DASTY), a French software company, or Okta Inc. (OKTA), a San Francisco-based cybersecurity company.

That meant even if an investor had the misfortune of buying Amazon at the very top of the bubble, there was still room for 80X returns over time. The online retailer is now worth almost $3 trillion today.

If Anthropic were going public at $36 billion, I’d be grabbing my checkbook. I might even take a flyer at a $100 billion valuation.

But that’s not the case. The AI lab is going public closer to a $1.5 trillion to $2 trillion price tag. To earn an 80X return, Anthropic would have to reach a valuation of $120 trillion to $160 trillion, depending on its IPO price.

That $160 trillion is twice the value of the entire U.S. stock market today. It’s twice the value of all real estate in America, including housing, office space, and farmland. In fact, $160 trillion would make Anthropic more valuable than the combined net worth of every American household.

That’s the uncomfortable truth about Anthropic’s rumored IPO valuation. The company might succeed beyond anyone’s expectations, yet its investors could still earn disappointing returns.

When you pay a price that already assumes a spectacular future, there’s precious little room for anything less.

You might as well play roulette. At least there, you’re guaranteed a 35-to-1 payout if you win.

So, Where to Invest?

Here’s my secret to investing:

I explore for opportunity in areas of the market that most investors are ignoring. 

The lesson I took from the dot-com boom wasn’t to avoid technology stocks. It was to avoid paying prices that already assumed a company’s wildest dreams would come true.

That’s why I spent much of 2000 looking beyond the obvious internet winners.

In fact, Barron’s published my warning about Corning Inc. (GLW), one of the hottest stocks of the dot-com boom. Within a year, it had fallen 87%.

Instead, I recommended Humana Inc. (HUM), a health insurer that was putting the internet to work to make its existing business more efficient. That recommendation eventually gained more than 4,000%, even as many of the internet’s infrastructure builders struggled.

I’m applying that same discipline to AI today.

And I see a similar split on the horizon for AI companies: the AI Separation.

On one side are the AI Builders — companies spending enormous sums developing the technology and infrastructure behind the AI revolution. Some will become extraordinarily successful businesses. But investors paying extravagant valuations for them may discover that even spectacular business growth produces disappointing stock returns.

On the other side are the AI Appliers: established businesses using AI to lower costs, improve productivity, and increase profits. Some of these companies are still trading at valuations that leave room for pleasant surprises.

I believe this AI Separation will begin on November 4, the morning after the midterms. It will happen just weeks before Anthropic’s shares start trading.

I’ve put together a free presentation explaining exactly how this happens, which household names are caught in it, and the first AI Applier I’d buy – absolutely free. You can watch it here.

Anthropic may become one of the great companies of the 21st century. I wouldn’t bet against that possibility.

But at a $1.5 trillion or $2 trillion valuation, investors would be paying an enormous amount for a future that hasn’t happened yet. I’d rather look for companies where the future doesn’t have to be quite so spectacular for the investment to work.

Mario Puzo had the right idea about roulette. Sometimes the smartest bet is to find a different game.

Regards,

Eric Fry

Editor, Smart Money

The post Anthropic Could Be the Next Amazon, and That’s the Problem appeared first on InvestorPlace.

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