Is this the dot-com bubble again? Nearly $1 trillion gone

There's no easy way to say this, but we might be witnessing the collapse of the AI bubble in real time. Over the last two weeks we've seen over $2 trillion wiped out in the stock market. Amazon's down 12%, wiping off half a trillion dollars of its market cap. Google is the same, wiping off another $0.5 trillion and Intel has seen a drawdown of 30% last Friday in a single day in the opening hours, its biggest drawdown in history, and it's all.Because people are losing faith with the hundreds of billions of dollars that are being invested in AI Capex to buy GPUs and to build these new models. It's getting very costly and people don't see the return on that investment. They don't see how AI is going to make money. And this isn't just something happening in the West. China's stock market is down 40% over the last couple of months, the biggest crash they've ever seen. And the big question on my mind is, are we in another dot com era bubble.Is just 100 times bigger and is gonna result in a much worse crash. Well, the thing is, someone's already answered that question for us. The hyper scales, Amazon, Microsoft, Meta, Google, and all the AI labs have made their decision, and it's clear they're doubling down. Next year we're planning to spend over $1 trillion on compute, buying GPUs, building data centers, investing in power, etc. to stand up these next-gen AI models.That we still haven't quite seen the ROI from. And the craziest part is all of this is being basically paid for by two companies, Anthropic and OpenAI. So the big question mark is, are these companies one, gonna be able to make enough money, and 2, continue growing at the rate that they are? Well, the answer is there's a lot of nuance. It's partly like the dot com era bubble, and there's certainly things that we need to watch out for and manage risk, but it's not entirely true. If you look,At any of the earnings reports from any of these companies that are tanking over the last week, you'll see that they're making money and they're having record quarters making more money than they have in the prior 10 years. So the question we have to ask is, why is the market worried? What do they see that companies don't, and why they're still questioning that the money that's being made isn't really real. So we'll get into all of this and more. I'm gonna break it down for you on today's episode, brought to you by Q Qualcomm.So first, some quick context, this drawdown really started around 2 weeks ago, and it was from one single tweet from Elon Musk where he responded, yikes, to the overleveraging of debt seen in neoclouds, neoclouds being the ones that buy up this compute GPUs and serve it to some of the AI labs. And the company in focus at that time was Coreweave. Coreweave subsequently then dropped down around 30 to 35% in its stock price, as well as other competitors.that were close to it, like Nebius and Iron, and so people really started to double down and ask the question, are we spending way too much money on GPUs and all of these GPUs actually being used? Do we have the power and the electricity to power them? Now that then tied into last week's record earnings week, where basically the majority of the companies that being hyper scales like Microsoft, Amazon, came out with their quarterly earnings. And it gives you an insight into the numbers.As to what's actually going on behind the scenes, 3 things were very clear. One, they're spending more money than they can afford. Their free cash flow has officially gone negative for the first time for all 3 of these companies, Google, Amazon, and Microsoft, for the first time in a decade. So they're technically in the red, and they're borrowing a lot of money and using profits from other business lines of their business to double down on this bet that we still haven't seen play out. Then number 2.the ROI on that investment is starting to be seen from them selling compute. So they would sell compute to say like Anthropic or OpenAI and they would make a profit on that, and all of their cloud service providers, so AWS, Google Cloud, Microsoft Azure, posted record earnings. Then that leads me to 0.3 which is, I guess why the market is tanking. The fundamental business model of.The internet, which is basically search and ads, is crumbling, and Google is kind of like the leader here. The point is that Google has driven ads and sales and revenue for the entire internet economy since the start of it. So the idea here is any company that sits on top of Google Search basically relies on Google Search and search is starting to break. And the main reason why it's starting to break is people aren't going to Google.com anymore. They're not.Searching things up, they're not scrolling down a list of links and trying to select which one. They're just using AI to do all of that for them. They're outsourcing it to AI and AI doesn't have a monetizable search revenue, and most importantly, it doesn't belong to that system, that Google set up. It belongs to anthropic, it belongs to OpenAI and any other competitor that has an AI chatbot. And so that's why you're starting to see this affect companies that aren't.Necessarily affiliated with the AI bubble. Let's take Reddit for example. They announced their earnings again, you guessed it, record earnings, all positive, no reason why the stock would crash, and yet it crashed around 26% in the opening hours of its trading. Why? Because they noted two things. One, search ad revenue wasn't driving enough traffic to their site as usual, and that's because, as Google mentioned a day earlier in their earnings, were justLosing kind of our grip on this because AI search doesn't monetize in the same way. But there's also a second thing happening which is arguably more concerning, and I'll stay on Reddit as an example. Reddit is starting to build up walls around its service to stop people accessing it for free, which is crazy because the internet economy, the way that it was able to prosper in the first place, was because we ended up becoming more open. It started off very closed with the internet.And then we moved over for it becoming much more open and society and the world benefited a lot more, we had all free access to information. And Reddit has been kind of like the bedrock and core of like the cultural pulse on society, if that makes sense. And now if you wanna access Reddit information, you need to create an account and log on to it. And the main reason why they're doing this is they're concerned that their entire company and moat will get replaced.By AI, Reddit basically has an enormous trove of data from people's comments, subreddits, threads, etc. and so this information is very valuable if it's working to inform you to make a purchasing decision or research something or whatever that might be. News often breaks on Reddit.And to date they've been given that away for free, but what AI is doing is they're taking this data, they're training models to then become smart on this data, to effectively become your own personal Reddit.And then Reddit's not getting paid for any of this. Now traditionally, Google would drive all of the traffic to Reddit. Reddit can display ads, etc. etc. but if you're just communicating to the internet via your AI agent or your AI chatbot, why on earth would you go to any other website, bar just your chatbot LLM interface, such as Cloud, chat GBT or your personal agent interface. And so that's one of the main.reasons why I think we're seeing a negative correction towards the entire AI bubble. But the second thing is equally as important, and that is a potential overbuild in AI Cape. So right now, we have invested on the order of, I believe, just over $1 trillion buying GPUs, standing up data centers, connecting it with power lines, all to.To train AI models that we don't quite know how it's going to end up benefiting society in the long term, right? There's a lot of question marks around, OK, what's the necessary ROI from this. In fact, we had a report from the chief economist of Apollo, I think a few weeks ago, basically saying, we haven't seen where the money's being made outside of the 7 companies, the 7 top companies in the world.7 top companies in the world are these hyper scalers who are buying these GPUs to then sell to two companies, Anthropic and OpenAI. So you can see how the circular economy is being criticized right now, basically saying,I don't know where the money is coming from, but it's not just where the money is coming from, it's also the ability to deliver on this. Two points here. Microsoft's intended spend for next year is around $170 billion. That's huge. But a chunk of that comes from this year, where neoclouds or third parties which they engage with to deliver and stand up these data centers weren't able to deliver on it. And the main reason.The reason is they couldn't construct it fast enough, there was too much regulatory red tape, and it was just hard to get their hands on certain credit financing and GPUs. And the second point is, they're realizing that it's so much harder to build these data centers than they initially projected. And it's not a matter of, oh, it'll get delayed by a few weeks or maybe a couple of months in the worst case scenario. We're looking at potentially years. So there's two forces.At play here. One, who's paying for all of this? Right now, it's two companies, Anthropic and OpenAI, and a heck ton of financing and loans. Just to put this into perspective, I think I saw a JP Morgan report which basically said that around $2.9 trillion is planned on being spent by some of the top, I think 10 companies in the world over the next couple of years, up until 2028.Half of that is being financed by the hyper scales and these companies themselves. So they will pay for it off their own bank balance sheet as well as any money that they make in the future.But the other half is being financed, and that financing is getting quite expensive right now. We saw last week where Colweave's borrowing debt basically rose to around, I think 16% when it was 10% literally two months ago, and we're starting to see companies, even the top labs like Anthropic are struggling to get financing. They recently tried to close a, I think $63 billion deal.Which Hok Tan from Broadcom had to like meet with the bankers and like really push them to give them better rates, otherwise, like the deal wasn't going to go ahead. So there's a lot of pressure in this bubble when it comes to money, the money is effectively thinning. And the second force is the business model for AI relies on these models being able to.Train on the open data of the web. So we're talking about all the data in the web that can allow it to get smarter and smarter with every model generation. But if we have companies like Reddit, which owns a large portion of the data on the web, putting up walls and banning access for AI labs or models to kind of get smarter.You can see how all of this money being invested in Capex and GPUs might actually not be put to good use because we're gonna see a slowdown in models getting smarter. And on top of that, it also makes it harder to build a really cool product. I use the example of Metamuse, which is like one of my favorite personal agents and honestly favorite AI products of the year, and I have.No vested interest in meta at all, I just enjoy the product. It's so good because I can just talk to it and it goes off and does things for me, right? But one of the main enablers allowing it to go do things for me is having access to these different types of information, and one of the things that it does for me is it can do some of my Amazon shopping or Instacart shopping or DoorDash ordering, right?But Amazon recently shut off access to MetaMuse for the exact same reason that Reddit has, which is, I don't want you, Meta, being the interface that kind of drives traffic towards our website that drives more purchasing utility. I want it to be the old model where I'm in control and I'm able to figure out what customers want and.They don't want. In the traditional mode, you and I would go to the Amazon website and we would scroll, and Amazon would see that. They would see what we click on, they would see what we review, etc. etc. If it's instead an AI agent doing that, if it's instead an interface that I interact with that has nothing to do with Amazon's website, then they lose a lot of important customer behavior and analytics that will inform.How they are to build billions and billions of dollars more value for their company. So the conundrum here is, if they build up walls, if a company as big as Amazon builds up walls, then every other company is going to do the same thing. And what that world looks like, AI agents interacting with AI agents is still unclear. OK, so are we in a dotcom era bubble? Let's answer that question on today's episode brought to you by Qualcomm.Firstly, the bare case is, let's see, there's a concentration risk. So 7 of the top companies in the world are the ones that are spending all of this money to fund this Capex buildout. And it's important to note that if it wasn't for these 7 companies, the entire Fortune 500 index would be down this year. A lot of companies on average performed badly, it was only.These 7 companies that were keeping the index profits and chart go up mentality alive in the first place. A lot of the money is being borrowed, around 50%. Again, of $3 trillion that are being committed over the next couple of years, half of that is being borrowed at pretty high interest rates. The question is, can they be able to pay all of that back? Well, that depends on AI making money in the first place.Place. And that leads me to number 3, which is, if you believe what Chamath is saying, around 75% of every dollar spent in AI is through VC subsidized dollars. So it's this whole circular economic loop. And the fourth final one is companies are now starting to build up walls. So we're doing the opposite of what we hoped or intended, which is AI just goes out and does everything for you toAI can go out, but then they're just gonna get blocked by a bunch of walls because these companies don't wanna give access to them. So that's the bear case, but I want to focus on the ball case because this is ultimately how I view it and how I feel things are gonna play out over the next 6 months to a couple of years. Firstly, if you want to compare this to the dot com era bubble, there's one very obvious distinction. In the dot com era bubble, there was a lot of supply beam.Built up, but zero demand, like literally not enough demand to satisfy even 20% of what was being built. It was a massive overbuild. We are seeing the opposite here. Back then, it was promises. It was like, yeah, we're going to pay you this amount of money. Over here, we're seeing quarterly earnings result of money, cash in hand, being paid to these companies that are investing.A lot of money into this CapE. So they have demand of people actually buying these products using the models. If you look at Anthropic's recent S1, you'll see that they are making not only a lot of revenue, which is the fastest growing revenue of any company that we've ever seen in the past, but the revenue is also lean, meaning the amount that they invest to get that revenue is now overwhelmingly positive. Number 2, thePeople or companies that are spending, in this case versus the dot com era bubble, are companies that can actually afford it. I'm talking about Amazon, Microsoft, Meta, Google, and the likes, which have such a huge amount of money on their cash balance sheet, and yes, they may now be going into cash flow negative, but the idea is they have other business lines that are generating billions and billions of dollars every.Single month, every single quarter, every single year. So they feasibly have a way to be able to fund this. If you compare that to the dot-com era bubble, that wasn't the case. OK, but then you might add, how is Anthropic and OpenAI, they're startups, that's what a lot of this purchase demand comes from. That is right, and Anthropic has committed to around $0.5 trillion to $750 billion worth of spending over the next 5 years, a heck ton of money.I looked at the S1 earlier this week and I saw, well, the main thing being that they have around $132 billion on their cash balance sheet, but most importantly, they only spent $7 to $9 billion on compute. The rumor had it was that they were overspending, that they would be in the loss, but actually if you remove that and some of the share equity positions, which was recorded as a loss on their balance sheet.They would actually be turning a profit. Now it doesn't matter if you agree or disagree with that, that's just the direction that they're heading, they're eventually going to be turning quite a big profit. So the idea here is if OpenAI is also working at a similar rate, which my inclination leads me to believe, then we end up with these companies being able to pay for a lot of the GPU compute that they're paying the likes of Amazon, Microsoft, etc. to pay for, and remember,Amazon, Google and Microsoft aren't just selling to these two companies, they have a heck ton of enterprise contracts of which around 50% of Anthropic's revenue actually feeds through. So Google Cloud, Microsoft Azure, AWS all have enterprise customers that are paying those companies in order to get access to cloud and chat GPT. That's not direct to OpenAir, so the idea is these companies are generating quite a.Heck ton of money. And so when I look at these enterprise companies, I'm like, OK, well, a lot of these enterprise companies are in the Fortune 100. They're not VC backed. So this is coming from money that they're making and they're not going to be spending this money if it doesn't end up with them making more money. And when I look at the net revenue retention, which is uh NRR stat, basically tells you how much money.Someone spends at the start of the year using a product versus how much they're estimated to spend at the end of the year, for Anthropic Claude at least, it's 900%. So you end up spending 9 times more because the product is that good. I don't think that's made up. And the final point I'll make, which I think is arguably the most important and biggest point to make, the internet error still ended up panning out pretty damn well. Yes, we saw a massive crash in correction.But that also led to the birth of some of the biggest, most important, relevant AI companies that backed the entire economy. Forget about the internet economy, the internet economy is the economy today, right? And so whilst we may see, yes, a huge inflation in this AI bubble, and I definitely think we need to have cause for concern, call out the risks, monitor the risk and make sure that we don't overstep, we should also expect some kind of deflation or correction of this entire bubble.And I would actually argue that that is what we're seeing right now. And a main reason why we probably won't result in an overbuild or dot com error type bubble is because it's really hard to overbuild right now. In the dot com era bubble, you could build out the telecom lines and like overinvest in that, and that's what ultimately led to the collapse. Here.You're restricted by a lot of electricity production and the ability to stand up power to fund these GPUs and data centers, so I think inherently, a lot of these big hyperscales and AI companies are seeing this and thinking, yeah, as much as I want to double down, we aren't gonna be able to spend money as fast as we would like because we just can't. And that works as an indirect risk manager, I guess in a way, where it prevents us from inflating the bubble too much, but I do.I believe that the market is in two buckets right now. Some people that are thinking long-term about this and are betting that this AI thing is gonna pan out pretty impressively over time, it's gonna consume anything and everything and generate a huge amount of wealth for the world. I sit in that bucket, and if you're a long-term investor, you know, I'm just buying some of these dips and just waiting for to see how the market kind of pans out and making sure that I don't recklessly throw money into this market. But if you're a short-term investor and you're kind of like looking at these,Inflated valuations, you know, anthropic potentially coming out at a $2 trillion valuation, uh SpaceX at a $3 trillion valuation or whatever that might be, you're kind of looking at this and thinking, well, damn, like this might be overvalued and you might be right over the next 6 months. So take both of these things into account and hopefully this was a good enough deduction, at least on my internal monologue as to how things are actually panning out. Like it's easy to look at the markets and panic, but it's also important to understand the nuance between historical context and what's actually going on today.So yeah, I guess, you know, let me know your thoughts. I'm sitting here on my own kind of like working through these things, trying to figure out what makes sense and what doesn't. And maybe there are folks out there with different perspectives that might make sense and change my own perspective. So if you're on Spotify or Apple, give us a rating, leave us a comment, helps us out massively. And also uh DM or comment, uh, any kinds of thoughts or feedback that you have, any kinds of topics that you want me to cover. I'm all ears and I see all of these things and I really enjoy making these episodes, so.Yeah, I guess that's it. Thank you so much for listening to today's episode brought to you by Qualcomm.