Any geek with a calculator has known for months that while AI is here to stay in
some form, the financial house of cards that has propped up the recent explosion
in investment is at best unsustainable
and at worst threatens to destabilize the world economy. But the cracks are
starting to show in a way that I don't think anyone can ignore anymore. video
cards reports that DDR5 prices have
begun to drop in markets around the world. And while many AI leaders claim
that we are not in a bubble, in an interview with the Verge way back in
last August, OpenAI CEO Sam Alman himself acknowledged that when bubbles
happen, smart people get over excited, acknowledged that the way that some
money is flowing into the AI space is not rational, and also said someone's
going to get burned. I mean, of course,
he doesn't think it's going to be him, but his credibility took a pretty big
hit recently when he told two of the biggest DRM producers in the world,
"Yes, I think I'll buy 40% of your total
production capacity. Here's a letter of intent to that effect." Followed by,
"Actually, lol, never mind." What?
That's the big business equivalent of, "Oh, oh, yes, Mr. Furley. I know it's
the first of the month, but don't worry, the check's totally in the mail. So,
let's talk about why I think that we are right now at the beginning of the end
for the irresponsible money that's getting dumped into AI infrastructure
and why I think this will finally be a break for consumers after months of
beatings. Now, to continue my own beatings until Segue improves
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Let's start with the very basics. What is a bubble? Probably the best plain
English definition that I could find came from Investopedia, who defines it
as an asset's price rising far above its
real value because many people rushed to buy it, hoping to sell it at a higher
price. The earliest recorded example is tulip mania. A period during the mid600s
when tulip bulbs became the status symbol duour in Holland, causing values
to soar uncontrollably with rare specimens apparently rivaling the price
of a fine house on the Amsterdam canal.
When the inevitable crash occurred, it wiped out as much as 99% of the total
market valuation, leaving many speculative investors deeply indebted.
That doesn't mean that tulips became worthless. They've just fallen a little
bit behind relative to other assets. With that out of the way, then what
makes AI a bubble? Well, the biggest one is the valuations of the companies who
are leading its development. In no particular order, anthropic 380 billion,
XAI, 200 plus billion. Open AAI an
eyewatering $852 billion. Like
seriously, they're practically knocking on the trillion dollar door, which isn't
inherently a problem. There's plenty of legitimate members of the Tea Club. But
here's the thing. With some notable exceptions, those other members also
have Mondo revenues to go with their Mondo valuations. Samsung, for instance,
while totally participating in the AI boom in the form of HBM memory
manufacturing for GPUs, also happens to
have revenues that exceed $220 billion
US a year. How has their value fallen
below OpenAI? I mean, in fairness,
OpenAI did recently boast that they have exceeded revenues of $2 billion a month
and hit this milestone faster than internet era defining companies like
Alphabet and Meta, which is definitely impressive. But, uh, let me let you in
on a little secret. As someone who runs a business, I am acutely aware that
revenue and profits are not the same
thing. See, Samsung is making over $28
billion a year in profit. Open AI is
doing about that in revenue while still
burning billions of dollars a year after over a decade of operation with no end
in sight. So what's their plan? More
consumer AI subscriptions. Open AAI says
this is going to require massive investments in infrastructure to flood
the world with intelligence as cheap and ubiquitous as electricity. After which I
assume the plan is to leverage their position to squeeze their locked in
customers for profit. it. I mean, they already have 900 million users. That's
about one in every 10 men, women, and children on the face of the earth. Sure,
they can go after the other nine, but I kind of have a hard time believing that
that's going to be the difference between losing billions and making
billions. Enterprise tools are an interesting path. Except that paying
customers are the most likely to be critical of an AI that, for being
honest, is nowhere near true artificial general intelligence. And as for how
it's going so far, the integration of enterprise AI has been, let's call it,
uneven at best. Personally, I find it more of an irritant than a help from a
day-to-day perspective. But even if I
accept the premise that widespread corporate adoption of AI is inevitable,
how much of let's say my internal tools
helper LLM or my customer service chatbot would I really outsource to
OpenAI instead of just hosting locally on a quantized open- source model?
And so far, I've completely ignored the threats from commercial competitors like
Anthropic and probably more importantly,
Google, who hasn't just been sitting there. So then, wait, why have I only
talked about Open AI so far? I guess it's because kind of like you see in
crypto, where as Bitcoin goes, so does
the rest of the industry. Open AI tends to act as a pretty decent proxy for the
current vibes around AI as a whole. And
right now, things aren't looking so good for them. Let's look at some examples.
CNBC reports that amid concerns that
expansion ambitions were too great for the potential revenue that would follow,
OpenAI slashed their spending expectations, targeting just 600 billion
by 2030. That uh might affect their
ability to buy 40% of the world's memory, which in turn would take some of
the pressure off of competitors who are trying to keep pace. Energy costs. This
is another big one. It's the single biggest expense for AI companies outside
of the hardware itself, and they have soared over the last half a decade. It
wouldn't be a problem if it wasn't a trend that has only accelerated due to
the ongoing code orange state of current global affairs. Case in point, OpenAI's
abrupt complete cancellation of the Sora 2 video generation app. By all accounts,
it seemed to be just plain costing them way too much money to run. Then there's
Oracle, who meanwhile has been cruising from high to high, announcing a
partnership with OpenAI to build AI infrastructure. They've boasted that
demand for AI infrastructure continues to exceed supply, and they had an
exceptional quarter. And yet, according to The Independent, they just laid off
as much as 18% of their global workforce amidst a broader organizational change.
Now, their stock has actually jumped about 5% between conceiving of this
video and sitting down to write it. And it's probably going to move some more by
the time the editor gets their hands on the footage. But that doesn't change
that the overall trajectory is pretty rough. And they're sitting at about half
of their all-time high back in September. Microsoft is actually going
through a similar correction, sitting just 9% over the highest point it
reached in November of 2021.
Now, not every AI company is a similar story right now. NVIDIA is still selling
golden picks and shovels faster than they can possibly craft them. And Google
and Meta have both taken much smaller hits, more in line with the kind of
thing that happens during times of geopolitical uncertainty as money flows
away from tech bros and then towards weapons bros or their evolved hybrid
tech weapons bros. Anyway, that's a little off topic. Point is, I don't
think AI is going away. Meta got up on stage at ARM's AI CPU launch last month
to talk about their vision for AI's integration into their products and it's
clear that they are going full steam ahead. Every facet of the Meta
experience is going to have AI in it to the point where whether you like it or
even think about it, their 3 billion plus daily users will be using AI every
day. And that is going to take a lot of
infrastructure. Infrastructure that isn't built yet.
But I don't think that the Open AIs of the world are the ones that are going to
own that infrastructure. I could be wrong, but I see Open AI as
more of like a Dropbox like company, one that will probably survive the bubble
pop due to its ubiquitousness and its brand value, but that might struggle to
convert free users to paid users and ultimately have to settle for a niche
role in the industry that they defined. Meta and Google, on the other hand, have
something in common that I think has shielded them from the brunt of the bubble's deflation so far. They aren't
simply landgrabbing as much infrastructure as possible in hopes that
it'll be useful someday. Their valuation is based on their products usefulness
outside of AI and revenue that they derive outside of AI. So when OpenAI
stumbles, which they seem to be doing now, a bit of that competitive pressure
gets lifted and their infrastructure investments can maybe return to a more
as needed scale as they continue to find uses for this admittedly sometimes very
cool and useful new technology. Really what it comes down to for me is I think
that OpenAI's 40% DRAM decommmit episode
has rightly spooked a lot of the folks
who have been making multi-year, multibillion dollar investments,
assuming that the future revenue that they were building for was some kind of
guarantee rather than just a signature on a worthless piece of paper. And now
that that realization has happened, I think the bean counters are on the verge
of getting back in the driver's seat, which will hopefully see investments in
AI return to a more reasonable level as the winners determine what kind of real
revenue they can actually derive from AI services. With all that said, I do still
think it's going to take some time. Tulip prices didn't crash overnight
either. So, uh, hey, hang in there everyone, guys. I think there's light at
the end of the tunnel and it might not be a train. Oh, you know what else is at
the end of the tunnel? This cool not slop t-shirt. ltstore.com.
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description. If you guys enjoyed this video, you might like the one we did
recently showing that you don't actually need the most expensive DDR5 memory to
get peak gaming performance.