No their argument is that the existence of a worse quality cheaper product will eat too much of the market for the SOTA company, making the SOTA company less profitable (not necessarily unprofitable) because the number of people who need/want the quality difference supplied by the SOTA product aren't enough to pay to sustain the extra resources required to supply the next iteration of the better product or even if they are then they are not enough to get a respectable ROI on the current investment.
>SOTA can also stop developing and spending on SOTA and just use a cheaper model
Yes, and they will be forced to (if the market shapes out as above) but the point is that then the company won't be getting the returns that justify the valuation being talked about in the IPO and will likely never return the amount of money that has already been invested in it even if it is a profitable company. i.e. If I spend $20,000,000 making a lemonade stand that is a successful best in class stand and it nets me $50 profit a day then it doesn't matter how that as far as lemonade stands go that it's a pretty amazing example. I am effectively never going to see that 20 million again let alone a real profit.
They're not arguing that these SOTA companies aren't better, they're arguing that there won't be a decent return on investment let alone justifying further investment and means everyone will be taking a huge haircut on what is already invested (with the possible exception of early investors who take the bag with the IPO when it inevitably succeeds based on people disagreeing with this evaluation and thinking it a good investment or simply because of index funds being required to buy in)