Does booked AI demand justify more borrowing?

The irony is, unlike many exciting times in technology, they're trying to capture yesterday's demand, right? The demand is way outstripping our ability to build data centers and to fill them with hardware, all right? And so, you know, we have a $25 billion backlog.

Seek to 3:34

And we are not alone in that. The Open AI, Xanthropics, you go through this list of, Google wants more data centers, Microsoft wants more data centers, AWS wants more data centers, right? All of these players are not chasing sort of, if you build it, they will come. They're chasing, the demand is booked.

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I don't think that's the question. I think the question is, what is the ROI on input and output tokens per use case? What is the ROI of a random use of a model? And I think that that is a very good question. How many of those tokens are generally gross margin negative? How many of those are unprofitable? How many of those are profitable? And I think that's what they're trying to ask when they ask that question. They may just not know the technical intricacies to ask it that way. But I think that's what people are trying to debate when they're trying to guess. And I don't think we totally yet know.

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It goes into the box, and the first thing it does is, it pays the data center, it pays the power bill, it pays the interest and the principal, and then whatever's left flows back to us. Right? And so it is an incredibly well-structured, time-tested, pressure-tested vehicle to be able to borrow money against client paper and all of the other collateral around the deal, which is why CoreWeave, which is a company that many people haven't ever heard of, was able to go out and raise $35 billion in 18 months to build infrastructure at scale. But what's important to understand is, the economics in this box are such that within two and a half years of a five-year deal, we have paid for everything.

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People love Accounting Corner. I'll explain it because that is actually important. Under the Gap Standards, the General Accepted Accounting Principle Standards, you set a useful life and you reset that useful life as you do a reassessment on when you're actually using that asset, not necessarily if there's a better asset that makes more value. Let's just explain this again. You make a big investment in property plant equipment, PP&E, and that investment you write down over a period of time that you as an accountant estimate to be the useful life of that asset. So if you're going to use a building for 20 years, every year you write down the cost of that building by 1 20th. You don't get to write it all down in the first year. In fact, what Burry is arguing is that if you wrote it all down in the first year, your profit would go down and your business would look worse. So when you make an investment that you can use over a period of time, unlike salary, when you pay someone a salary, you're paying them for the hours they're working that quarter, that year. And so that money is an expense. It gets recognized as paid out that period. But when you make an investment in a building or a piece of equipment that you're going to use over time, you depreciate it just to go through that principle again. And so there's standards in GAP on how do you recognize the depreciation schedule? What's the useful life? And the useful life is when you're actually realizing return value from that asset. Burry's point is incorrect. On Twitter he said, the idea of a useful life for depreciation being longer because chips from more than three to four years ago are fully booked confuses physical utilization with value creation. That is incorrect. There is value creation because they are generating revenue from those chips this year, six years later. So there is in fact a useful life for that chip that has extended into year six. It doesn't matter and this is a part of the gap point that I wanted to bring up. So what he is arguing is you should depreciate it over say three years, which means you are doubling the cost every year and then it is all written off in three years. But if you did that, to give you a point of example, in Google's case, their total net profit would come down by roughly 10 to 12 percent. So it is not like they are cooking the books and recognizing some massive delta in their profit by doing this. The difference between three and six years is roughly 12 percent of their profit. And they are still using these chips. And what Gap says is that only if the new asset, meaning the new chips, replaces the old one, then the old asset's remaining useful life has to be marked down and you take accelerated depreciation that year. Or if the maintenance costs spike, which means you have to spend money to fix the asset, which is not the case with chips. The third is if the throughput requirements exceed the old equipment capabilities forcing early retirement. They're not retiring, they're still making revenue off the old chips. Or if technological obsolescence means that you're putting it up for sale, meaning you stop using it after a period of time.

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Hold on. I think the most important point of what you said there is, Chamath, this is a new asset and it's a new space. There might be some companies that are like, we're going to lose money on this and we're going to let you build, I don't know, Sora videos, right? That's just going to be a money loser for five years as we get ChatGPT to 2 billion users. We don't care about it. And those machines are going to have 90% of their utilization in the first three years. And then for the next seven years, it will be 10% of their value. They'll be doing some small jobs in the background that won't be as important. Accounting isn't built to do this kind of refined depreciation schedule.

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And there's already a private credit problem right now. So you just layer on private credit, like Owl Capital getting all the refunds. And then you have these huge companies that have cashflow, but they're spending all their cashflow on CapEx and then they're borrowing on top of that. 50-year bonds. Right. That's planning for perfection.

Seek to 2:23

The biggest risk to me is not on the demand side. The biggest risk is that you get a glut of compute and you get an overbuild. And the same way that we had dark fiber after the dot-com crash, if you had dark GPUs, that'd be a disaster for everyone. Especially if you built out your compute infrastructure expecting a spot price of 30 to 50 dollars a lot. As Elon said that they were expecting, right? So if all of a sudden there are too many people racing to provide this compute and now there's an oversupply and the market crashes, that'd be the risk factor. In a weird way, all the political headwinds, I think, insure against that outcome. Because it is so hard to build data centers for all the reason we said there's a whole moral panic slash hysteria slash hoax going on, that actually it's those political headwinds, I think, will almost guarantee that there's not an oversupply relative to the exponentially growing demand. So in a weird way, you're protected against that. But Jacob, can I shift gears for a second? Absolutely. To tell you what's so brilliant about what Jensen did here.

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