RE: $500B AI revenue expectations gap

They say there is a $500B "gap between the revenue expectations implied by the AI infrastructure build-out, and actual revenue growth in the AI ecosystem" [1].

Part 1

Given the business that Sequoia Cap is in, it should not be surprising that they’d say things like:

> Investment incineration… a lot of people lose a lot of money during speculative technology waves. It’s hard to pick winners, but much easier to pick losers

> Winners vs. losers… there are always winners during periods of excess infrastructure building. AI is likely to be the next transformative technology wave… lt will cause harm primarily to investors.

i.e. invest right and you’d capture a huge amount of value. Invest wrong and you’d be burning your money. So do investments with us.

Part 2

What I found interesting is the point about there being a:

> $500B … gap between the revenue expectations [$600B] implied by the AI infrastructure build-out, and actual revenue growth in the AI ecosystem [$100B] … that needs to be filled for each year of CapEx at today’s levels [GPU $150B, “Data Center Facility Build and Cost to Operate” $150B (they seem to have included OpEx in their “CapEx” figure)]

This means there’s either some amazing AI killer apps that will make $500B in sales or some AI investments will get incinerated.

Investment incineration "will cause harm primarily to investors" [1] — Nvidia, the data center builders, facility operators, and power companies will all have gotten paid for the work they will do — but I wonder what are the broader implications of the $500B revenue expectations gap.

Is it — the investments, not necessarily the GPT/LLM tech — irrational exuberance?  How much of today’s Big Tech valuation is driven by it?  How sensitive is it to interest rates?  Notice this "bubble", if it is one, is not occurring during a ZIRP [3] period.

It seems AI startups aren’t the ones building AI data centers — "much of the incremental data center build-out is coming from big tech companies" [2].  So startups seem less affected by that cost.

But actually 50% of the $500B revenue expectations gap is “software margin” — that’s the margin earned by “The end user of the GPU—for example, Starbucks, X, Tesla, Github Copilot or a new startup” [2].

Which means when some of the $500B expected revenue doesn’t show up, it’ll be hitting the AI startups' margins.

Now remember the other 50% is “CapEx”: Nvidia GPU, and “Data Center Facility Build and Cost to Operate”.  And remember that Nvidia, the data center builders, facility operators, and power companies will all have gotten paid for the work they will do — because they don’t work for free or for startups' equity.  So it seems they won’t have their margins squeezed.

But doesn’t that also mean when some of the $500B expected revenue doesn’t show up, it’ll be hitting the Big Tech AI data center’s top line?

I don't know enough to know what will happen, but it seems some amount of AI Investment cooling will hit AI startups and Big Tech's AI data center buildout.  Big Tech has been and remains profitable, and their GPUs are paid for, so it'll mainly change their product priorities and revenue forecasts (and thus stock price?).  AI startups, however...

But perhaps, just in time, the Fed's interest rates will go down for unrelated reasons.

[1]: https://www.sequoiacap.com/article/ais-600b-question/
[2]: https://www.sequoiacap.com/article/follow-the-gpus-perspective/
[3]: https://en.wikipedia.org/wiki/Zero_interest-rate_policy