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

How to protect your cheques in Canada

Not how to protect your cheques physically - that's up to you and your martial arts training.

I mean how to ensure your cheques are deposited to the account of your choosing.  Because even though you write on your cheques who the payee ought to be, it can be signed off to a third party to be cashed or deposited.

Other places in the world use markings to "cross" the cheque to ensure it is deposited to a bank account only, and not cashed (literally exchanged for cash).  In other places, you may write "non-negotiable" to ensure it is deposited or cashed only by the person named on the front as payee, and no one else.

But Canada and the USA does this differently.  USA should be similar (but you should check for yourself) to Canada, but the following is Canada specific:

Write "For deposit only to account of payee" on the back of the cheque to ensure that the cheque can only be deposited (not cashed) and to the named payee only (and can't be negotiated --- signed --- away to a third party) [1, 2].

[1] Added Protection when paying by Cheque --- Financial Consumer Agency of Canada
[2] Cheques - What You Need to Know --- Canadian Bankers Association

Facebook IPO

There's so much news on how Facebook's stock dropped like a rock after the IPO on Friday May 18 when the price was defended at about $38 by the underwriters (Morgan Stanley mainly).  It's now at about $34 at the end of Monday.

Let's not forget that prior to Thursday May 17, the IPO price range was announced to be at $28 to $35 [1].  Not only that, but they also increased the size of the IPO by 25%, as I recall.  This is essentially the same as noted by the Washington Post:

"Facebook originally set a price range of $28 to $35 for its IPO, which would have valued the company at $95 billion at the high end. Last Tuesday, though, it increased the price range to $34 to $38 per share, valuing the company at as much as $104 billion.

"Then, responding to extraordinary demand from prospective investors, the company announced on Wednesday that it would add 84 million shares to the offering."

So Morgan Stanley got caught up in their own hyping up of Facebook, ups the size and price of the IPO, and now the price drops back to where they initially priced it (for a smaller number of shares).  That's not the best outcome, but it's not as if it means Facebook will go under.

Now if the price keeps falling, that's another story, but at this point, it seems a lot of people are buying on hype, so it's no surprise that some people are going to have a bad time.

[1] Facebook IPO: The art of pricing the right pop