Gavin Baker - AI Market Jitters - [Invest Like the Best, EP.485]

My guest today is Gavin Baker, founding partner and CIO of Atreides Management. This is our seventh conversation, and just two months after Gavin's last appearance. It's about the gap between what the market is doing and what companies are seeing. It's been a tough month or so for public AI names, but there's no sign of a slowdown on the ground in Silicon Valley. We discuss the latest moves, contracted vs. spot GPU prices, the game theory of memory supply agreements, and why Claude has become the Walter Cronkite of the stock market. We close on SpaceX, orbital compute, and what Gavin sees as the single biggest risk to all of it. Please enjoy this conversation, from the famous table at Benchmark, with my friend Gavin Baker. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- Become a Colossus member to get our quarterly print magazine and private audio experience, including exclusive profiles and early access to select episodes. Subscribe at colossus.com/subscribe. ----- Ramp's mission is to help companies manage their spend in a way that reduces expenses and frees up time for teams to work on more valuable projects. Go to ramp.com/invest to sign up for free and get a $250 welcome bonus. ----- Trusted by thousands of businesses, Vanta continuously monitors your security posture and streamlines audits so you can win enterprise deals and build customer trust without the traditional overhead. Invest Like the Best listeners get a special offer of $1,000 off Vanta when you go to vanta.com/invest. ----- WorkOS is the infrastructure B2B and AI-native companies use to sell to enterprise. It covers everything enterprise security requires: SSO, SCIM, RBAC, Audit Logs, AI governance, and more. Trusted by 2,000+ fast-growing companies, including OpenAI, Anthropic, Cursor, and Vercel. ----- Rogo is the AI platform for finance. They're building agents for Wall Street that are trained to understand how bankers and investors actually do work: from diligence and modeling, to turning analysis into deliverables. To learn more, visit rogo.ai/invest. ----- Ridgeline has built a complete, real-time, modern operating system for investment managers. It handles trading, portfolio management, compliance, customer reporting, and much more through an all-in-one real-time cloud platform. Visit ridgeline.ai. ----- Editing and post-production work for this episode was provided by The Podcast Consultant. Timestamps: (00:00:00) Welcome to Invest Like The Best (00:02:35) First Question: July Was 2022 in a Month (00:04:08) The Private Companies Public Markets Can't See (00:05:06) Old GPUs Repricing Higher (00:06:53) Walking Through the Month (00:08:22) Kimi, GLM 5.2 & the Open Source Freak-Out (00:10:51) Real Yields, Spreads & CDS (00:11:54) Does the Build-Out Need Credit? (00:15:22) A Sell-Off With No Clear Villain (00:17:35) Open Source as Dark Matter (00:18:39) Nvidia's Lowest Forward PE in 10 Years (00:21:35) Claude as Walter Cronkite for the Stock Market (00:23:55) Continual Learning & Sample Efficiency (00:25:19) What Would Actually Scare Him (00:26:38) Routers & the Multi-Model Future (00:30:51) Tokens as a Percent of Comp Spend (00:33:37) The Game Theory of Breaking an LTA (00:36:41) Nvidia's Credit Wrapper & Revenue Share (00:37:45) What He'd Do If He Ran Hynix (00:41:46) Who's More Bullish than Him (00:43:28) China's DUV Machine (00:46:10) Bull Case for Software (00:48:16) The RSI Maximalist View (00:49:31) Inference Clouds Growing Without Burning Cash (00:50:35) The Biggest Risk Is Regulation (00:53:44) Telling the Story Better (00:57:15) Dark Horses (00:58:02) SpaceX in the Public Markets

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Patrick O'Shaughnessy?

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• 0:42Patrick O'Shaughnessy?

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• 1:30Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper, check out Colossus, our quarterly publication with in-depth profiles of the people shaping business and investing. You can find Colossus, along with all of our podcasts, at colossus.com.

• 1:54Speaker 01

  Patrick O'Neal is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc.

• 2:22Patrick O'Shaughnessy?

  Gavin, it's only been two months. Like the model release cycles, the gap between our podcast episodes are shortening. We're basically, you and I are basically on a model release cadence at this point.

• 2:32Speaker 02

  Well, I was sensitive to criticism that I think somebody pointed out that our podcasts were coincident with like, local market peaks. And nobody could say that after this.

• 2:46Patrick O'Shaughnessy?

  What's on your mind? It's been a crazy...

• 2:47Speaker 02

  Yeah, I would describe July as 2022 in a month.

• 2:51Patrick O'Shaughnessy?

  Yeah.

• 2:52Speaker 02

  There are some fundamental negatives, which we should talk. But on the whole, the balance of fundamentals, I think, is improving significantly. Loads of AI names are down 50%, 60% from their highs. We'll call it 40% to 60% in a month in a straight line. And I asked you before we started, you've been out here for the summer, have you heard a single negative quantitative metric about AI? A single instance of deceleration?

• 3:26Patrick O'Shaughnessy?

  Nothing.

• 3:26Speaker 02

  Nothing. In fact, every metric is accelerating.

• 3:31Patrick O'Shaughnessy?

  And to your point, not just blind optimism from people excited about AI, but like, here's some data that they can show you from their different vantage points.

• 3:38Speaker 02

  Absolutely. I mean, however you cut it, whether you cut GPU availability, whether you cut GPU rental pricing, whether you cut like the spot price of DRAM this month,

• 3:51Speaker 02

  token growth, everything is actually accelerated. And I do think a big part of the problem is, one, the market does not have visibility into Anthropic, OpenAI, and then I would say these open-source inference clouds that monetize inference here in America, fireworks based to Modle together. And the picture looks very different when you see that, because open source has accelerated massively because of GLM 5.2, Kimi K3. And then Nimetron continues to kind of chug along. We had a great, very small, American open-source model release. OpenAI has accelerated. Anthropic continues to grow really strongly, and is almost certainly

• 4:36Speaker 02

  pumping out significant amounts of free cash flow. And I just think if you know, there's this chart that everybody looks at of semiconductor cash flow going like this, and hyperscale free cash flow going like that, and you're missing these private companies. But I also think that that chart misses something very important, which is just that you have everyone in 24 and 25. Even if you were really bullish, you thought that GPU prices, if you're really bullish, you thought they would decline slowly. If you're bearish, you thought it would decline precipitously. I don't think anyone in 24 or 25 thought that the prices of old GPUs

• 5:19Speaker 02

  would be going vertical. Everybody thought, hey, we're going to be smart, we're going to sign these long-term contracts. And to some degree, like a lot of the deal clouds had to do that because they needed an off-take agreement to finance the GPUs. And so essentially, you have the contracted base of installed compute, trading at a massive discount to the current spot market. And as those contracts roll off, and compute gets repriced higher, it's spot can decline, and compute will still get repriced higher. I think you're going to see a lot of acceleration that's going to answer these ROI questions. You've started to see that this quarter. If we look at operating cash flow, not free cash flow,

• 6:04Speaker 02

  operating cash flow from Microsoft, Meta, and Amazon has reported accelerated from 28 to 32. There are some actually pretty big unusual items now, like these hyperscalers, they always seem to have billions of dollars of legal expenses that are unusual, mostly fines to the EU. But there was an unusual amount of one-timers this quarter. And if you adjust for that, we went from 28 to 35. That's a material acceleration at this scale. And that's really before they start to light up the Rubens, which will come at a meaningful premium, before these contracts reprice. It's been a challenging month. Is it helpful to kind of like walk through the month, how we got here?

• 6:45Patrick O'Shaughnessy?

  Yeah.

• 6:46Speaker 02

  So first, Meta is going to rinse out compute. And this is seen as like very bearish. They have excess capacity. They're going to cut CapEx. This is a disaster. This is not at all what it was. They just reported, they didn't cut CapEx. What it was is they saw SpaceX have a big installed base of compute and sell some big trading-optimized clusters into the market at a truly massive premium to these contracted rates. And at least analysts like that, they saw an opportunity. There's a lot of speculation they're going to raise capital. So maybe what they're thinking is like, hey, we will show on a small chunk

• 7:26Speaker 02

  of capacity that we can generate really strong IRRs. Then we'll go raise equity capital, and we'll be off to the races and probably raise CapEx. It doesn't look like that's what they're doing. But nonetheless, the market sold off because it interpreted this very negatively. And I was really sure it wasn't negative. A lot of telemetry into Meta's CapEx plans. None of that telemetry had shifted at all. If anything, they're continuing to get more aggressive. And then shortly after that, they released their best model in a long time, Use 1.1, which is actually a very good model. It was overshadowed by Grok 4.5, but it was a good model, way better than anything in two years. So just no chance

• 8:10Speaker 02

  they're taking their foot off the gas. Then Kimi comes out. And then there's this huge freak out about open source. And at the same time, this Silicon Data Token Index kind of dips and flattens. And the two are connected. What the Silicon Data Token Index captures is mix. And they don't see all the tokens, but because of GLM 5.2, and then Kimi, all that took a while to layer in, there's kind of a mix shift in this data from more expensive frontier tokens, which probably have an inference margin, we can debate whether it's 80, 90, or 95, but super high, towards open source tokens. And for whatever reason, the market thought this was negative. But the reality is, a token is a token, and you need the

• 8:55Speaker 02

  exact same amount of compute to make a token all else equal. It takes the same amount of flops, the same amount of memory, the same amount of watts. Tokens are not equal, but broadly speaking, all open source taking share does is take margin dollars out of the frontier model layer. There is elasticity, thereby driving token demand. You need more demand for compute. And the margins, you know, Anthropic and open source, they all run on the same underlying cloud providers who charge the same amount of compute. So you're literally just taking margin from frontier models and essentially driving more

• 9:38Speaker 02

  margin dollars into the AI infrastructure layer.

• 9:41Patrick O'Shaughnessy?

  That was the catalyst. This combination of things.

• 9:44Speaker 02

  Well, yeah. Jitson is the world's largest supporter of open source. He is like a super idealistic guy. He's a patriotic American. I think he always does what's right. But does it really stand to reason that Jitson would be the world's biggest supporter of open source if it was bad for his business?

• 10:04Speaker 02

  He'd still support if it was the right thing for the world.

• 10:06Patrick O'Shaughnessy?

  Yeah.

• 10:07Speaker 02

  And by the way, I think open source is really important to worlds where there's just one or two dominant frontier models that charge like 90% margins. It's not good for humans. It might not be good for society. And I think we want a lot of models as we've discussed before. So then it's like, okay, the market digests that and comes to with it. Then China has a D U V machine. You know, everybody said these baskets has caused this huge sell off in semi cap equipment. And then we get to what I think is, in a lot of ways, the real concern, which is real yields have gone up, which makes sense. You know, we're investing a lot to fund this investment and for sure, credit is an increasing part of it, even if the majority is still funded out of operating cash flows.

• 10:48Speaker 02

  So real yields go up and spreads widen. Meta priced a bond last week and it did not price where you would think a meta bond would price. And this just shows that the credit market.

• 11:01Patrick O'Shaughnessy?

  Nvidia C D S was was blowing out.

• 11:03Speaker 02

  All of the C D S for everybody is is blowing out. And, you know, very smart private capital people just like, hey, this is just exactly what you'd expect. These are just banks hedging their commitments, but nonetheless, it doesn't look good. And these are undeniable facts. C D S is up, spreads widen, real yields are up. That would be really, really scary if we needed debt to finance this build out. And that's where I think it's this differential between spot and contract pricing for the installed base of compute is so important.

• 11:37Patrick O'Shaughnessy?

  It's so important to understand what the financing will be like for the next six months or something.

• 11:41Speaker 02

  The degree to which this build out is going to require credit.

• 11:47Patrick O'Shaughnessy?

  Right. Which would be the classic capital cycle.

• 11:49Speaker 02

  Absolutely.

• 11:50Patrick O'Shaughnessy?

  Overextend ourselves with debt and that's where things get scary.

• 11:52Speaker 02

  A hundred percent of the debt fueled build outs, they demand immediate repayment. So if supply and demand get a little bit out of whack, things can unwind very, very quickly. That's what happened in the internet. If one believes, as I do, rightly or wrongly, after this month, I'm super open. You know, I'm, I'm looking like I've been pressure testing all of these and like, I really went deep on credit because hey, this is real. It's undeniable. And if we need credit to fund this build out, this is a significant negative. And if you model it out, if you look at the amount of gigawatts that are supposed to come on and consensus estimates for hyperscalers, they're effectively modeled, and these are gigawatts of Blackwell and Ruben.

• 12:37Speaker 02

  Ruben being Nvidia's next chip, Blackwell being the current chip. They are essentially modeled to monetize roughly at the rate of AMP here, which is two generations behind, not at Hopper, but AMP here. So there's 1.3 to 1.4 trillion in hyperscale operating cash flow. If you just assume, I think it's very unlikely they monetize at the rate of AMP here. We could go into why. Some of it comes from just seeing what is happening on the ground with the man here for real quantitative metrics. But like, let's just say they monetize at a discount to current Blackwells. Then it's more like 2 trillion of operating cash flow. And that kind of takes 700 billion of credit demand out ironically.

• 13:22Speaker 02

  As that improves all the credit ratios, as these installed bases of compute reprice, we're going to continue accelerating. Consensus is modeling at a deceleration, which I think is unlikely. Then the credit metrics look better. Then all of a sudden, it gets easier to finance with credit. Now, whether they choose to do that or not, we'll see. This is all a little bit, you know, I think we spoke.

• 13:46Patrick O'Shaughnessy?

  Two months ago.

• 13:47Speaker 02

  No, but the time before that about kind of the risks of a Blackwell air pocket.

• 13:51Patrick O'Shaughnessy?

  Oh, yes.

• 13:51Speaker 02

  Where you're spending hundreds of billions of dollars on Blackwells. They're mostly being used for trading initially. Trading does not generate a return. This could be a risk. We actually really saw that in the first quarter. I think one reason to the podcast two months ago, I got comfortable with that risk was just that you were seeing such incredible things out of Anthropic. And then it's like, okay, well, the market's kind of going to look past this. And it did look past it in April, in May, in June. And then in July, because of this kind of confluence of things, stopped looking past it. Just as the operating cash flow started to really accelerate. And this is just a fact.

• 14:35Speaker 02

  It is accelerating at big scale. You know, like Microsoft, they brought on a huge slug of capacity in the month of June. That didn't even show up in the second quarter. So essentially what this all comes down to is, do you believe that the quantitative demand signals seeing on the ground here at Silicon Valley from private companies are going to continue? Such that the installed base of compute reprice as higher as contracts roll off, operating cash flows go up, and you could fund most of this out of operating cash flows, maybe all of it. Like if it reprices at current rates, you could probably fund all of it for the next several years. It has been a very unusual episode in the market.

• 15:21Speaker 02

  We should talk about what the fundamentals are that are getting better that I'm talking about. Technicians would say it's actually in 22, okay, the market is worried about a recession, rates going up, inflation, that's what the market was worried about in 22. You knew exactly what it was. Okay, DeepSeek, you know what it's worried about. Liberation Day, you know what it's worried about. There's something very clear and in a weird way, that's comforting.

• 15:44Patrick O'Shaughnessy?

  Really sure.

• 15:44Speaker 02

  And here, you know, we talked about a lot of specific things. But it just feels all those specific things, with the exception of credit, are just kind of ridiculous. And so the fact that it is still going down, a technician would say, hey, that's, that's a little scary. It's definitionally the bullet you don't see that gets you. You know, I think we've talked before about how like, I think the three most important words in investing are margin of safety, but I don't know. But just, you've been out here for two months. I've been out here. I literally spoke to a company this morning who rented a cluster of several, and this is one of the sexiest startups that people want to be in business with.

• 16:27Speaker 02

  And they had rented a cluster of several thousand Blackwells and we'll just call it somewhere in the mid $2 per GPU hour. They're renting the exact same size cluster, essentially identical in every way, B200, no differences. And they're hoping seven months later to pay just under $4 today. Like, that's pretty crazy because again, you would expect a really gentle decline in prices would be bullish. Instead, we're up, depending on the starting point, 50 to 60% in six or seven months. There've been so many anecdotes like that. Like I think one of the inference clouds, I think it was based in, I'm not sure. They went on a podcast and they essentially said,

• 17:11Speaker 02

  we are planning to pay 100% more for Blackwells when our contract expires. And that just means that essentially all the hyperscalers are under earning. My main kind of mission out here this week.

• 17:25Patrick O'Shaughnessy?

  Is like pressure test?

• 17:27Speaker 02

  Yeah.

• 17:27Patrick O'Shaughnessy?

  Yeah.

• 17:27Speaker 02

  Tell me something negative. Like, you know, the question I asked you, is there one negative quantitative metric you've heard? Has been what I've been asking everyone.

• 17:37Patrick O'Shaughnessy?

  The main thing people are saying is the third party data suggests that the anthropic curve started to go off of its trajectory a little bit. That's like the only thing that I.

• 17:45Speaker 02

  I think that may very well be true, but then you have OpenAI and open source massively accelerating.

• 17:52Patrick O'Shaughnessy?

  Yeah, the complex.

• 17:52Speaker 02

  And if you look at the sum, it is net accelerating. Like I think open source is a little bit of a, you know, they talk about dark matter in the universe, like open source is kind of dark matter to the public markets. It's hard for public markets to measure it, but like, if you just track what these inference clouds are saying, people saying things on podcasts or people saying things in meetings, they're not audited financials. Demand is clearly accelerating, which makes sense because you have this huge capability leap with GLM 5.2 and Kimi K3, which I think we're going to see continue. I think you're going to see Nvidia bring Nemo Tron steadily closer to the frontier. But man, it has been a humbling, challenging month. But just,

• 18:37Speaker 02

  it's also like, wow, I've kind of pressure tested every assumption. The underlying fundamentals are improving. Nvidia is actually, as we record this, at its lowest forward P E of the last 10 years.

• 18:51Patrick O'Shaughnessy?

  Crazy.

• 18:52Speaker 02

  The only time the cibis have been cheaper were Liberation Day, DeepSeek. Those were kind of B bottoms.

• 18:59Patrick O'Shaughnessy?

  And that means to you just that the market thinks they're significantly over earning?

• 19:03Speaker 02

  Yeah, the market 100% thinks they're significantly over earning. And we need to be humble.

• 19:10Patrick O'Shaughnessy?

  Maybe they are.

• 19:10Speaker 02

  Maybe they are. But like, my kind of mission out here this week was to look for negative data points as hard as I could. And normally you come to Silicon Valley and, you know, there's a mixture of here's something negative, here's something positive, da, da, da. Unbalanced, it's positive, you know, tech, it creates value over time. But I haven't been able to find one that is like a quantitative metric. That anthropic third party data, I would say that seems to be hotly contested by the, by the anthropic shareholders who are, who are chomping at the bit to tell you what they know. We're also very scared. They're not going to get an IPO allocation. If it gets back to the company that they're the ones who said, actually, things are great.

• 19:55Speaker 02

  You know, you can just see anthropic shareholders, like they want to be like, it's not true. It's hard for me to believe that open source and OpenAI have accelerated to the extent they did. But yeah, Anthropic is clearly in the pole position. And oh, by the way, Grok and Cursor have also, you can see from third-party data, like July was a pretty transformational month with Grok 4.5, Grok builds coming out. So it has been a tricky month. And I have a friend, I have a friend at Fidelity, who just says, the way to have navigated the last three years is just do the dumbest, most superficial thing as quickly as possible and just cycle between them.

• 20:38Patrick O'Shaughnessy?

  What is that now?

• 20:39Speaker 02

  Yeah. Well, that's just, that has been to cut risk all month in response to these narratives that factually, except for credit, are not true. And the work we've done makes me think that credit just isn't going to matter as history prices. Let's just say you do need credit to like, build the flops we need. Well, if credit's not there, it just means the flops that are there are going to be even more valuable. And then eventually that will improve the metrics. And then it's like, credit is there. So as long as we're in a compute shortage, which I'm just like desperately trying to find a single side that we're not in one, and that it's not actually getting worse, almost by the day,

• 21:23Speaker 02

  it's almost like the problem becomes the solution. And then this company, Black Forest Labs, I think that's their name, I hope I got it right, because there is an interesting essay that got sent to me. You know, I think we've talked before about Mike Mobison's theory that breakdown in diversity is kind of what leads bubbles and crashes. And essentially everyone I know in the public equity investment business, whether retail or institutional, every piece of news gets fed into Claude. And Claude, Claude code, sometimes a Claude agent, and it's probabilistic, there's probably not that much variation in the way it's interpreting this news. It's almost like we're back to, in stock market terms, there's never really

• 22:07Speaker 02

  been this way in the stock market before, but people talk about the fragmentation of media and how it used to be like Walter Cronkite, only voice of truth, and now we don't have that anymore. It's like Claude is kind of Walter Cronkite for the stock market, and everybody just believes whatever it says. And by the way, it's really smart, but it's not always right. It's interpretation isn't always correct. And with the stock market, you are fundamentally dealing about, you know, a probabilistic Bayesian interpretation of the future. It feels like, in the market, here's this piece of news, it gets fed through Claude, Claude interpreted this way, a huge chunk of people trade on Claude's view. And

• 22:51Speaker 02

  so you've seen stuff, there's this guy, TBU, he's like a part of the anonymous semiconductor mafia on X. Actually, a very smart guy, I know him in real life. But he posted this amazing chart of Japanese capacitor stocks. And he said, we've had an entire capacitor cycle in six weeks. And it's true, you know, the stocks like, whether they double, triple or quadruple, I don't know, but like, vertical, and then whoosh, like the actual fundamentals haven't even hit. And yet you've already had what probably would have normally been a three-year cycle in like, six weeks.

• 23:26Patrick O'Shaughnessy?

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• 24:07Patrick O'Shaughnessy?

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• 24:52Patrick O'Shaughnessy?

  and you can request a demo at ridgeline.ai. What's your sense of being out here, especially, it makes me especially curious about this, the innovation that is going on here to improve the efficiency and every aspect of serving inference of training models, et cetera, and how that will affect like, public markets over time? Like, have you learned anything interesting about the long lead time innovation type stuff that has you especially excited or curious?

• 25:19Speaker 02

  Yeah, I am very curious. A lot of people seem to feel like they are very close to solving continual learning and sample efficient learning, which we've talked about before. And it is possible that if those are solved, that could that be like a temporary discontinuity in demand if instead of, I was trained on effectively 20 billion tokens, and then it's like, these models are trained on 300 trillion tokens. And if, you know, you could trade something on 10 trillion tokens, and then let it out into the world and learn sample efficiently, that doesn't sound good for trading demand, but like, trading has a percentage

• 26:00Speaker 02

  of semiconductor demand to compute is going to asymptote to something not approaching zero, but very small. But I would say that is the most interesting, and you know, who knows if it's long horizon or short horizon. You know, SSI says that they're going to come out with their model in August. There's this whole generation of new labs that are focused on this.

• 26:21Patrick O'Shaughnessy?

  And this would be good for the world.

• 26:23Speaker 02

  This would be amazing for the world. This would be awesome for the world.

• 26:26Patrick O'Shaughnessy?

  We all want, we want this.

• 26:27Speaker 02

  Yeah, we want this. It would be amazing for the world. And it's just, it's hard for me to believe that that would actually be negative for AI infrastructure demand. But again, trying to be really, really open-minded. I would say that was probably like, the biggest scientific or technical takeaway. You know, it's also

• 26:46Patrick O'Shaughnessy?

  We just don't know.

• 26:47Speaker 02

  Well, yeah. And also, like, Nvidia is heavily involved with all of these startups.

• 26:53Patrick O'Shaughnessy?

  If you were just forced to come up with the set of circumstances that would really switch you around and get you really scared, would it just be that this operating cash flow thing doesn't play out, and therefore we just need to debt finance this?

• 27:05Speaker 02

  Yeah, if the operating cash flow does not continue to accelerate, that would be negative. And that to some degree is going to be a function of how Anthropic, OpenAI, Grok, Cursor, and open source do. If there was a pretty dramatic contraction in GPU prices that was kind of sustained, the market would react to that instantly. That would be worrisome. If it started to get to be really easy to get GPUs, I mean, have you heard anyone say they have too many GPUs? Like, not a single person?

• 27:39Patrick O'Shaughnessy?

  No, in fact, it's the opposite. It sounds like a drug market or something.

• 27:42Speaker 02

  Yeah, it really does. It's just wild. But yeah, I mean, I think there's a long list of pretty obvious things. If the sum of these labs plateaus or starts to decline, that's really negative, unless it's just because open source tokens are net growing the pie and taking share. And I do really think the future is multimodal, particularly for the AI natives. They're going to want to take an open source model. It's got all these inference clouds have gotten really good at supervised fine tuning and reinforcement learning. So you could take your data, customize an open source model, and then get something that you could put behind a router, and the router routes it to often first your model,

• 28:26Speaker 02

  and then Claude, frontier model, whatever Claude, Grok, checks it. And you can, in a lot of cases, get slightly better outcomes at half the cost. But again, that half the cost, I think a lot of people hear that, they're like, that's bad for AI demand. It's actually not at all, because the cost the user pays is just a function of the margin of the tokens. And you're literally just shifting tokens from really expensive tokens with like, 90% gross margins, to tokens with maybe, let's call it a 30% gross margin. And that's where the savings are coming from, but the tokens cost the same amount of compute to produce. And then also, all these things are kind of happening on different

• 29:11Speaker 02

  cycle times. All these big public companies are like, oh my God, my AI spend is 20x'd, I've burned my budget in three months. So they set up a router, and that actually cuts their AI spend, but it doesn't really impact, it may actually increase the amount of tokens that they are generating just by shifting them to these cheaper open source tokens. And that's just more compute. So a company getting smarter about which model to use for which task, that may lead to stabilization in their spend or even a decline, but it actually has nothing to do with the amount of GPU compute hours they are effectively

• 29:50Speaker 02

  consuming behind these model layers of this router. The GPU compute hours probably are going up as you shift to these cheaper tokens you can use more of. That's happening to like, a cutting edge of public companies. And then you have this whole wave of AI natives, they're leading into this so hard, and they're not hiring humans, they're just putting it mostly into tokens. They're not slowing down. And then you have companies on the East Coast of America, who have like, barely adopted AI, companies broadly speaking, you know, not on the coast, who maybe are cutting, and then Europe, who's just trying to figure out how to regulate AI.

• 30:33Patrick O'Shaughnessy?

  Before using it.

• 30:34Speaker 02

  Yeah. So just like, there's kind of these differential waves of adoption all happening at the same time. But the thought I can't get out of my mind is like, I think I said it maybe last time, but just, yeah, Alex Sasterd, like 500,000 people in the world, 250,000, maybe are using agentic AI. And we're in an acute compute shortage. There's seven or eight billion people on the planet. What happens when we go from 500,000

• 31:00Patrick O'Shaughnessy?

  To 1%.

• 31:01Speaker 02

  To 100 million, you know, to 500 million. It is interesting. You know, a lot of people, I do think it's like helpful to post on X to see the pushback. And a lot of people are saying, we accept your argument that hyperscalers are under earning as compute reprices, their operating cash flows could accelerate, and maybe we could fund this. But like, where's that operating cash flow going to come from? Where is the customer? And kind of definitionally, it has to either come from faster economic growth through productivity, kind of Satya's comments, like, either we're going to start growing 10% or we're not, or labor substitution. And for sure, I think at a lot of these AI natives,

• 31:43Speaker 02

  you're seeing labor substitution, but not because they're firing people, they're just not hiring nearly as many humans. The gross profit dollars per FTE and A16Z, Iconic, a bunch of companies have done this work, they're vertical, particularly relative to past generations of startups. And then it is interesting, are you doing any surveys of your companies and their tokens bid relative to labor spend?

• 32:07Patrick O'Shaughnessy?

  Oh, yeah. I mean, it's tokens as a percent of total comp spend or something like this.

• 32:12Speaker 02

  And what are the ranges you've seen?

• 32:13Patrick O'Shaughnessy?

  I mean, like in the really pilled companies, like it gets really high, 20%, 25%.

• 32:19Speaker 02

  Our friend Dylan Patel at his company, so he's an ASI backseat, but he's at 30%.

• 32:25Patrick O'Shaughnessy?

  That's probably the highest one I've heard.

• 32:27Speaker 02

  I've actually heard of 50. And there's $25 trillion in knowledge work. Let's take your 20% number. That's $5 trillion. And that either comes out of labor substitution or faster economic growth. And we really, really, really want his humans to come from faster economic growth.

• 32:46Patrick O'Shaughnessy?

  One interesting thing I heard this morning from one of the great leading technology CEOs that's founded several companies. If you look at the founder-led and controlled companies and adjust for some of the like COVID era over hiring, nobody's really laying people off. These are the people that would probably be most quick to adopt AI to become more efficient or whatever. Like, they're not really doing, jack aside, like huge scale layoffs, which probably tells you something about where they think there will be lots of opportunity to still have people plus.

• 33:14Speaker 02

  100%. Well, the bull case, you've seen church from cognition, Ray up at Stripe, that the companies that are spending the most on AI are growing meaningfully faster.

• 33:22Patrick O'Shaughnessy?

  Yeah, I love that cognition index.

• 33:24Speaker 02

  Yeah, the cognition index is wild. All the skeptics will point out rightfully, it's not really controlling for industry. But then if like you dig down into it, I think one of them gave an example of, I forget if it was a plumber or an HVAC contractor, but like, everybody who's a blue collar worker is doing great because of AI. By the way, something that I think we should touch on, and we could do it now or later, is just everybody is citing these LTA's. So everything's in a shortage. If there's weakness, it's just because we can't energize the gigawatts fast enough. The gigawatts are going to get energized, like regulatory policy is moving in a good way, the turbine manufacturers, the diesel jet manufacturers, you know, you're ripping turbines off old airplanes and, you

• 34:05Speaker 02

  know, reconditioning them and then repurposing them. There's crazy things happening. Capitalism is very, very good at this. But I do think one of the most important questions of the market, and like a transition of the market that I got wrong, is we are shifting, particularly from memory more than anything else, from crushing numbers in the short term, to they are trading short-term upside for these, what they call supply chain agreements, long-term agreements, LTA's, there's many flavors, but customer prepays, there's a floor and a ceiling. And this comes back to the point about labor, because, you know, a lot of people, after firing too many people during COVID, were really reluctant to lay people

• 34:50Speaker 02

  off. They talked about labor hoarding, if you remember a few years ago, you remember this?

• 34:54Patrick O'Shaughnessy?

  Yes.

• 34:55Speaker 02

  Let's just think about the game theory of breaking an LTA. So there's four companies that matter at scale. There's Amazon with their tradiums, there's Google with their TPUs, there's AMD, and then there's Nvidia, who's like much bigger than everybody else combined. Let's just say it's 2027. And it's very important to realize, memory is, the more memory you put with flop for a given unit of compute, the more tokens you get out. It's the single most important thing you could do to increase token output per unit of compute. And then that obviously definitionally actually lowers costs, which is why the demand hasn't responded at all negatively. There's been no elasticity, just

• 35:39Speaker 02

  because it's the axis that is dominating all others. And this is, at some level, like a giant Game of Thrones or Impers between these companies. Okay, it's 2027 or 28, you're vaguely tempted to break one of these LTA's and try and get a lower price. But to a large degree, market shares, I think for the next several years, are going to be determined by supply chain allocations and kind of what you have pre-purchased. So if you break the LTA, this is assuming we're not in a severe oversupply situation. The game theory even holds in a severe oversupply situation. If you break your LTA, and then in the next

• 36:22Speaker 02

  two or three years, for any reason, leverage shifts back to the memory guys, you're out of business. It's over. Let's just say Google breaks an LTA. There's an oversupply, I'm making this up, at 28, 29. They break their LTA's. Well, if they're breaking their LTA's, it probably means, you know, you're oversupply, prices are coming down, and then, you know, capacity naturally contracts. Well, what do you think's going to happen to Google's allocations? And then, you know, this is a cyclical industry, and oversupply is followed by undersupply. What do you think they think is going to happen to their allocations next time? So I just think, given that this is the axis around which kind of everything

• 37:02Speaker 02

  is revolving, you might blow up your entire business and your franchise by breaking an LTA. And that was never the case before. Apple, who cares? They don't have a competitor. They're overwhelmingly the largest purchaser. This is, you know, going back three, four, or five years. They know they can do whatever they want with no consequences, because their volume is so big, that even if they like super screw Hynek's Micron will of course take them. This is just different. You know, you have at least four players. Did you have all the startups? You're an investor and etched. If you break an LTA, they just say, okay, fine, great. You broke the price agreement. We're going to break the volume agreement. And screw you, we're going to give the volume to your competitor. You just lost share, you

• 37:47Speaker 02

  know? Nvidia's dominance, the current environment, the stint to which it favors Nvidia, it is a little hard for me to understand why it's trading at such a low multiple. In other words, if you need to be able to finance the chips, and you do, nothing's more financeable than an Nvidia GPU, nothing. If you need to get land and power, well, they're doing a very good job of playing that chess game and matchmaking. And then they've rolled out this really clever new business model, which I would describe as kind of like a credit wrapper with a revenue share if GPU prices are above.

• 38:22Patrick O'Shaughnessy?

  Backstop it. Yeah.

• 38:23Speaker 02

  Yeah. And this could lead to them having a really giant cloud business, effectively through royalties, really quickly. And it is another way of kind of alleviating this cash flow mismatch. Like, hey, we're making all the cash. This isn't really vendor financing, because they're not loading them the money. Somebody else is loading the GPU buyer the money. They're still making equity investments, but it's not like you're just putting money into someone. Then some of that money was used to buy your chips, even though Nvidia said that they write into all their equity investments that the money can't be used to buy Nvidia chips, but obviously money is fungible. And

• 39:02Patrick O'Shaughnessy?

  Funny thing. Makes no sense.

• 39:04Speaker 02

  Yeah. But, you know, I think at some level, it probably makes everybody feel better.

• 39:08Patrick O'Shaughnessy?

  What would you do if you were the member, like if you were the CEO of Hynek's?

• 39:11Speaker 02

  I'd do the exact same thing Nvidia is doing right now.

• 39:15Patrick O'Shaughnessy?

  Which is?

• 39:15Speaker 02

  I would be going to the buyers of GPUs, tradiums, and whoever, and saying, I'll participate in the Nvidia credit wrapper. Now, their business is just inherently less stable and predictable, but in some way, and maybe they just put up some cash upfront, so it's like they're not on the hook. I'm just making this up. But like, do something like you can, because you have money now, and credit markets are revolting. I'm sure our friends at Blackstone and Apollo are suggesting some variant of this to the memory companies. But hey, we will put up some amount of money from our cash flow today, and then

• 39:57Speaker 02

  it's gone, it's surety, that makes the person who's extending the debt feel better. But we want some sort of a cut of the ongoing revenues as well. That is 100% what I would do. And it's almost like a logical extension of the LTA's where they're trading upside for durability. Here, you can effectively get a royalty on recurring revenues. And that is what Nvidia is doing. And I do think that is very misunderstood. And I think it would serve Nvidia well to really explain this. One, they're really bullish on AI. Essentially, every time they haven't taken an equity stake in something, it's been a mistake. They've

• 40:39Speaker 02

  taken equity stake in everything, essentially, except the memory companies that for a long while Anthropic, that they took an equity stake in Anthropic. But like, why not if you have cash flow and you're bullish on AI and Jensen, because he sees every lab, he knows all the advances, you know, like all these continual learning labs, you know, safe superintelligence is now working with them. He sees everything, and like what he sees makes him bullish. So one, have some equity upside, and then two, have a revenue share, and you're generating hundreds of billions of dollars of free cash flow, and helping to kind of bridge what is clearly kind of a gap, at least given everybody's gone free cash flow negative, until the operating cash flow accelerates enough that you can

• 41:22Speaker 02

  internally fund this. Very opportunistic in a good way, and it significantly increases their revenue per gigawatt. And then it also strengthens their competitive position. You and I, we both have startups, but okay, that's great. Use that startup's chip. What prices are they paying at Taiwan Semi? Higher than Nvidia and all these guys? What prices are they paying for HBM DRAM? Higher? Can you finance those chips easily at the same rate as Nvidia? No. And so it's always like, there's a real burden, particularly if you use HBM DRAM, you're in the crosshairs of this. Unless like they made really different.

• 42:01Patrick O'Shaughnessy?

  Architectural choices.

• 42:02Speaker 02

  Architectural choices. Everything that's happening is actually pretty good for him. By the way, going back to game theory, Anthropic, if they had been as aggressive on compute as OpenAI had been, they would have run away with it. Now OpenAI is back in the game. I think Grok is in the game. Those are the companies on the parade of frontier.

• 42:23Patrick O'Shaughnessy?

  And they have the compute.

• 42:24Speaker 02

  Do you think, after watching that, anyone is going to let off the gas?

• 42:29Patrick O'Shaughnessy?

  Right.

• 42:29Speaker 02

  It was, I think, four months ago that Dario was talking about how it was a really thoughtful commentary, but he's like, it's really, really hard because if you buy too much compute, you could go bankrupt at the scale of these things. But if you don't buy enough, you could lose. Well, OpenAI just got back into the game and now SpaceX is in the game in a big way with Grok 4.5 and Cursor. After watching that, from a game theory perspective, is anybody going to back off anytime soon? Especially if it can be funded out of operating cash flow.

• 43:02Patrick O'Shaughnessy?

  Have you met anyone in your travels out here that you would say is like way more bullish than you? And if so, what do they believe that you don't?

• 43:09Speaker 02

  I mean, essentially, everyone out here is more bullish than me, man. You know, I read this thing that Dorkesh wrote and I was like.

• 43:17Patrick O'Shaughnessy?

  The 3X compute price thing or whatever?

• 43:18Speaker 02

  Yeah, well, he was, I forget what it was.

• 43:20Patrick O'Shaughnessy?

  No, no, it was like 15X or something.

• 43:21Speaker 02

  Yeah, but no, but just basically that renting an H100 for a year would cost $250,000.

• 43:27Patrick O'Shaughnessy?

  And that's 15X the current spot or something?

• 43:29Speaker 02

  Exactly. Like, wow, you know? That was just like.

• 43:33Patrick O'Shaughnessy?

  That wasn't in my book.

• 43:34Speaker 02

  That wasn't in my, forget my like Bayesian probability space of expected outcomes. That wasn't even in my considered but dismissed his totally unlikely outcomes. Dorkesh, he's a very smart guy. He's very plugged in. Then he pointed out that margins on compute are going up. The amount of compute is going up and inference margins going up. And if you multiply those three, that's how you're getting this crazy acceleration into some of the labs plus open source, although the margins on open source are not really going up. I look at what's happening in the stock market and I feel like a foolish optimist. And then when I talk to people, whether it's people at the labs, anyone in this ecosystem,

• 44:19Speaker 02

  I'm like bearish relative to essentially everyone. It's just a strange state of affairs.

• 44:26Patrick O'Shaughnessy?

  What do you make of the DUV news out of China where I've seen reactions really along a spectrum of like, this is the equivalent of like what ASML had in 2001 or something? Or like, no, this is actually the first bit of news in a new story for how we should think about the global supply of cutting edge compute?

• 44:44Speaker 02

  I think both could be true. Make an analogy, like, let's just say a DUV machine was a jet turbine. And now like an EUV machine is like a warp drive. DUV machines, like a propeller plane, EUV is like a jet turbine. They didn't have it before and now they allegedly do. And that is like a phase transition. You've gone from like liquid to solid. Now that solid, that jet engine, prop plane, whatever, is 25 years behind. But still, it's important and I don't think should be dismissed. But I also, you know, it's kind of funny. You just see this in the stock market. The stock market massively overreacts. And then if this ever hits ASML's orders, maybe it hits it in five years.

• 45:29Speaker 02

  And like the market has forgotten about it, got worried about it, forgotten about it, got worried about it, forgotten about it multiple times along the way. So I do think that was probably an overreaction, but we shouldn't dismiss that either. And if you're China, like this is really important to you. You know, there are some reports that like an EV machine had been smuggled into China. I mean, what a feat of espionage because those things are like giant and delicate. They're huge. Well, I don't know if that's true. You know, there's some noise about it, but you know, China, they're really, really good. They're really, really smart. They work brutally hard and they see this as super important for them as a country.

• 46:11Speaker 02

  But are they going to go from the year 2001 to 2026 or even 2030? It's a learning by doing and you can't accelerate the doing. You can't teleport into the future. You actually have to go through those learning cycles. Is it significant? Yes. Did the market overreact? Probably. It's very hard as an American to really understand what is happening in China and like have total conviction and clarity, you know, like for better or worse, we are decoupling. That is a process that has been set in motion. And at this point, it almost feels like it's self reinforcing on each side. That's unfortunate. We are where we are. They're not going to stop.

• 46:56Speaker 02

  Neither are we.

• 46:57Patrick O'Shaughnessy?

  Any commentary on like every other company in America? Like, I feel like right now it is 10 companies, couple private.

• 47:04Speaker 02

  Not last month. Everything but AI was vertical. And I do think open source getting closer to the frontier and companies like Fireworks making it really easy to customize a model such that you could get, in some cases, better than frontier performance for a meaningfully lower cost. That is a godsend for the software industry. And it's also a godsend for all these AI natives. You know, it's like our friend Vishya, I think he said two years ago, I've never seen more companies go from being founded to like $50 million a year in revenue and generating cash flow in like whatever it is, nine months. And it's hard to know if any of them are durable because a lot of people would dismiss them as chat GPT wrappers.

• 47:48Speaker 02

  Well, now with open source, you've generated some data that's unique to your use case, whatever your vertical you're going after as a wrapper is. Fireworks did come out with a really cool product called Nexus. And if you're using Claude Code, OpenAI Codex, Grok Build, it is literally three lines of code, like 20 words. And Fireworks ingests your data. They can RL a model and then there's a router that sends the query and they've had amazing results. And this is kind of the solution for every AI native. And that's why you saw Harvey, before it was acquired, Cursor lead so heavily into this.

• 48:32Speaker 02

  Harvey, Lagora, all of them. Because if you can go from just using one, two or three frontier models to using those frontier models for whatever it is, 30 to 60% of your token consumption, and then use your own RL model, all of a sudden you're not a wrapper. You're way more defensible.

• 48:52Patrick O'Shaughnessy?

  I was so interested by that Cursor thing that came out. I think it was Cursor where it's sort of like AI is speedrunning like what we've learned amongst humans, which is you could use the frontier model to plan and then farm out tasks to the dumber models and it's 15 times more efficient or whatever the metric was.

• 49:07Speaker 02

  And it may be, and this is like super ironic, lower margin open source tokens that are just a little bit behind the frontier. We have friends who believe that once a frontier model hits RSI, it will actually have a dramatically lower cost to serve at every level of intelligence by kind of distilling this. And then there's no place for open source. And I would say that's like a Anthropic, OpenAI, Grok maximalist view. We shouldn't dismiss anything. Anything is possible. We want to be very humble. I particularly want to be humble after the month I've had. But that doesn't seem that likely to be.

• 49:52Speaker 02

  One, because there are so many of these AI natives that have actually generated a decent amount of domain specific proprietary data. And before open source had this moment, these inference clouds and these routers really developed, you kind of didn't have a choice. Like whatever the terms of service were, you accepted them. But if you can now get off that treadmill, that gives you a degree of independence, maybe durability, safety. But going back to your point, it may be that these cheaper tokens massively inflate the value of the most cutting edge frontier tokens.

• 50:33Speaker 02

  Because if today, if you have, I'm going to make this up, 120 IQ open source models and they're really cheap to run, doesn't that make a 160 IQ model that can orchestrate them more valuable? We talked last time about how I have been really surprised that so much of the economic returns have accrued to the frontier. That is changing with what we're seeing with these inference clouds, together modal, base 10, they're all working in a very cash efficient way. What's shocking about those business models is they're growing almost as fast as the frontier labs in the early days, but burning very little cash.

• 51:12Patrick O'Shaughnessy?

  Right.

• 51:13Speaker 02

  It's pretty extraordinary to go back to silly SaaS metrics, like the, you know, the rule of 40 perspective, like these are crazy numbers.

• 51:22Patrick O'Shaughnessy?

  Do you think there's a lot of instruction in just like the distribution of pay inside of an organization? Like, the CEO makes X times more than the median person at a company, and maybe that's frontier tokens versus, you know,

• 51:32Speaker 02

  Absolutely.

• 51:34Patrick O'Shaughnessy?

  Something simple like.

• 51:35Speaker 02

  Yeah, it may be that what we discussed last time where, you know, frontier tokens, like the pie is growing really, really fast. They may continue to capture the overwhelming majority of economic value, but not all of it the way they have been. And open source tokens might be the majority of tokens processed. Again, going back, that's great for infrastructure demand, because a token is a token, and it takes the same amount of flops, watts, space, cooling, to make.

• 52:02Patrick O'Shaughnessy?

  What's the worst thing that could happen in AI? Is it regulatory?

• 52:06Speaker 02

  I think regulatory has to be the biggest risk. It's the most obvious risk. And so that was kind of one reason I was excited to be here this week. I want to be scared, you know, I like, I don't want to feel like a lunatic watching these stocks get cheaper, thinking the expected forward returns are going up, while it feels like the on the ground fundamentals have pretty materially improved in July relative to even June. But I still come away thinking like, regulation, it just has to be the biggest risk. Like, you just can't ignore New York making a data center moratorium. We're living in this weird,

• 52:46Speaker 02

  post factual, post logical political world. And I mean, I think the AI industry, it has done a terrible job of PR. And I do think.

• 52:57Patrick O'Shaughnessy?

  I think it at least realizes that now.

• 52:58Speaker 02

  Yeah.

• 52:59Patrick O'Shaughnessy?

  Maybe if not fixed it, it realizes it.

• 53:01Speaker 02

  Yeah, but like, the political narrative, I think amongst a lot of ordinary Americans is like, data centers, they're going to raise your electricity prices, they're going to take all your water, and then they're going to take your job. The reality is, given the deals that are being cut now, when a data center goes in, electricity prices actually generally go down for everyone around there, because of behind the meter deals. This is that like data center pledge that Trump asked people to sign. Generally, the data center developer used to be, they just had to get the police department or the fire departments, like, new trucks and new cars and new body armor, whatever. Now, it's like, we're going to build you a hospital, a school, a new police station, and a fire station, and we're

• 53:41Speaker 02

  going to lower your power bills. How does that sound? And by the way, the jobs are ongoing, because it turns out that you kind of need these plumbers, electricians, HVAC contractors. Data centers are in a lot of ways, the best thing to happen for blue collar wages in my lifetime. And yet, you have the Democrats, who ostensibly represent the blue collar workers, taking those jobs away. It's just kind of wild how, what is the phrase, like a lie could go around the world?

• 54:12Patrick O'Shaughnessy?

  Fashion and truth gets out of bed, yeah.

• 54:13Speaker 02

  Yeah, fashion and truth gets out of bed. But an author made a mistake in a book. It overestimated the amount of water usage in data centers by 10,000 decks. Not a little bit. Like, not one order of magnitude, not two orders of magnitude, not three. She's admitted that mistake many times. I was completely wrong. It's like been super debugged.

• 54:34Patrick O'Shaughnessy?

  It's like the Popeye effect. Do you ever hear that example?

• 54:37Speaker 02

  No.

• 54:37Patrick O'Shaughnessy?

  You know Popeye ate spinach? The reason was same deal. In an academic book, they placed the decimal two things wrong. So spinach does not have more iron than everything else. It was just this one source, and then that propagated. People still say it has more iron.

• 54:50Speaker 02

  I literally had, I thought it had more iron. I mean, that's wild.

• 54:54Patrick O'Shaughnessy?

  Eight years ago.

• 54:54Speaker 02

  That's wild. I literally thought spinach had more iron. That's amazing.

• 54:59Patrick O'Shaughnessy?

  You're crazy.

• 54:59Speaker 02

  Yeah, you learn something new every day.

• 55:01Patrick O'Shaughnessy?

  Same thing, though.

• 55:01Speaker 02

  Yeah, it's the same thing. And it's just, so somebody just needs to tell the truth. I feel like the industry, geez, maybe if nobody else is going to do it, like, I'll do it. There needs to be some sort of foundation. Maybe it's a PAC that runs ads during the Final Four, during NFL games, during college football games.

• 55:19Patrick O'Shaughnessy?

  Here's the virtues.

• 55:19Speaker 02

  World Series. Here's what a data center does. Your power, a data center that signed this pledge in your community, your power prices are going to go down. They're almost certainly going to contribute to the community in a material way. You're going to see a massive influx of super high playing, blue collar jobs that are going to persist. And I think a lot of people thought that they were one time, and they're just not. Like, there's for sure a spike, and then that moves to the next data center. But there is an ongoing need for RMA, and then upgrades at these data centers, and technology is changing. So you're going to have more jobs, you're going to have cheaper power, you're going to have a wealthier community. There's going to be no impact on water, no impact on the

• 56:00Speaker 02

  environment. But it's easy to build the data center 10 miles out of town, you know? That story needs to be told, along with, we heard a story, I think we talked about it last time, about how AI is increasingly really saving lives, curing rare diseases. I think it was at ASCO this year, the vibe was like, this is the most scientific breakthroughs we've ever seen at a single conference. And for sure, some of that is due to AI. And so we need to tell those stories. Like, you know, if you have a sick child, sick parent, a sick loved one, like, AI meaningfully increases the odds of them recovering. Everybody needs

• 56:40Speaker 02

  to tell this. And I think people out here, all of this is so blindingly obvious to them. They can't process that this is a true, but wildly divergent view from most Americans. The industry really needs to tell its story better. New York, it just feels like is the first to admit it. And even in some of these deep red states, that are super pro-growth, they're just like, hey, you guys are not doing a good job telling your story. We can't tell your story. If you tell your story, though, we can retell it, but like, you're the experts. If you do not speak your own truth, no one else will.

• 57:21Patrick O'Shaughnessy?

  What have we missed?

• 57:23Speaker 02

  I do think something that is missing from all of this conversation about compute is what is going to happen when you put these SRAM-based accelerators that are not constrained by HBM DRAM, and are often made on older nodes that are not competing with like, the latest, greatest GPUs. When you disaggregate inference, people talk about pre-fill and decode, but decode is two parts, attention and feed-forward network. And like, the ultimate holy grail is if you could do pre-fill on one chip, that probably doesn't have HBM DRAM, do the attention on a super high-powered chip with HBM DRAM, and then do the feed-forward

• 58:01Speaker 02

  network on one of these SRAM chips. But like, the ROI on adding these SRAM accelerators to the existing installed base of compute and new compute. But like, what we're seeing is, you do better. You just can't beat SRAM, in particular for that feed-forward network. And no matter how much you try and get the ratio of compute to HBM DRAM to SRAM on the chip correct, the workloads are always changing, and there's different workloads. Being able to disaggregate it to these three parts, this is going to be really, really positive for the ROI on AI.

• 58:39Patrick O'Shaughnessy?

  For some reason, I just thought of a funny question, which I love their framing of Game of Thrones versus all these people. Can you imagine a player that is not currently on everyone's mind, becoming relevant at like, the major Game of Thrones scale? Like, that could be like, Micron, all of a sudden, someone that becomes as important as Anthropic, OpenAI, Microsoft, Amazon, sort of like a dark horse.

• 58:58Speaker 02

  Like, Leepu is probably a dark horse, lit at fireworks. She is an absolute killer. I think our friend Scott Wu, cognition is kind of.

• 59:11Patrick O'Shaughnessy?

  You're here to that one.

• 59:12Speaker 02

  Yes. I think those are the most obvious names.

• 59:19Patrick O'Shaughnessy?

  What about SpaceX? What's it been like watching that be digested by public markets, at least initially? Do you think the market understands it as a company? The most important new company to be public?

• 59:28Speaker 02

  It doesn't really feel like it does. The fundamentals have gotten better since an IPO, like Grok 4.5, the Cursor acquisition. Cursor has clearly accelerated meaningfully. They've shown over the last three years, they could bring on more compute faster than anyone, at lower prices. And now we know that they could, even adjusting for the spot first contract gap, their big advantage was, they came into the market, hit those spot highs. And in a strange way, like, one of the more bullish things for compute, is they put a vast amount of compute into the market overnight, and it wasn't even really a blip. It was like, the market just utterly absorbed it. The freight trade didn't slow down at

• 1:00:11Speaker 02

  all. A Substack writer will fund AI. They think that SpaceX is going to try and bring on eight gigawatts of compute over the next 18 months. So, eight gigawatts over the next 18 months. I will never bet against Elon, but I mean, that would be a truly incredible feat. Rates have gone up since they signed those last contracts, not down. And they're monetizing at something like 50 billion a gig. And consensus estimates for next year are 73 billion. So forget Starlink V3, forget Starlink direct to sell, Grok 4.5 and Cursor. I think that the sum of that probably hits a $10 billion ARR pretty quickly. Forget

• 1:00:55Speaker 02

  all of that. You know, forget the core base Starlink business. If they bring on anywhere near that, the consensus estimate is 73 billion, and that's eight gigs at 50 billion a gig. And obviously, that would not all be lit up at the beginning of 27. And it seems very implausible to me, like, I almost don't believe the Funder report. But, to this day, the only companies that have brought on more than 500 megawatts of power in a year are the hyperscalers, CoreWeave, Crusoe, and SpaceX. And SpaceX has kind of brought on the most, the fastest, at the lowest cost. And then, people do actually really like their clusters. But again, it's kind of like, the market is going to need to see that.

• 1:01:41Patrick O'Shaughnessy?

  That would not be the market's interpretation of SpaceX today.

• 1:01:44Speaker 02

  No, no. And it does feel like, you know, there's this big New York hedge fund short case on it. And I think they think the spot price for compute is going to go down 90%. You're going to bring on all this compute, it's not going to generate, you know, nearly as much revenue as you think. Maybe. But also, want to be really clear, like, I've seen Elon's companies do really impressive things. The Funder AI report of eight gigawatts in 18 months, I mean, I'm just quoting that because it's public, it's available to everyone. I think one of Elon's phrases is, we specialize in making the impossible late.

• 1:02:18Patrick O'Shaughnessy?

  I've never heard that. That's great.

• 1:02:19Speaker 02

  Yeah. You know, there's like kind of a lot of truths to that.

• 1:02:23Patrick O'Shaughnessy?

  Yeah, yeah.

• 1:02:24Speaker 02

  But I just think very little is built in from my perspective to that stock for the amount of compute that they might be able to bring on. And again, I don't think it's anywhere near eight. And it's going to be really hard and energizing these GPUs is really hard. But they've been good at it. It doesn't feel like that's in estimates or really in people's thinking.

• 1:02:46Patrick O'Shaughnessy?

  I'm thinking about that funny meme that says SpaceX, the data center company?

• 1:02:50Speaker 02

  A hundred percent. Absolutely. And then I would also just say, like, I did spend a lot of time at Starbase and orbital compute feels more real every day.

• 1:03:01Patrick O'Shaughnessy?

  Pretty cool to see that Starship landing the other day.

• 1:03:03Speaker 02

  Pretty cool to see the Starship landing. And it's, you know, it is funny. Our friends at Benchmark, they funded StarCloud. And I don't know, last time StarCloud is an orbital compute company that like SpaceX is kind of partnering with. They're going to, I think, let them use the Starlink laser technology, which is really important for orbital compute. But I do think that's like kind of a good sanity check. Last time I checked, the Benchmark guys were pretty smart. And they're not coming from the Elon ecosystem at all. And they chose to fund an orbital compute company at a decent valuation without the internal launch costs that SpaceX gets. To me, that's a good like, hey, am I

• 1:03:42Patrick O'Shaughnessy?

  Crazy.

• 1:03:43Speaker 02

  Am I crazy? And it's like, well, maybe I'm crazy and maybe Elon's crazy. And maybe Benchmark is also crazy. And maybe the SpaceX engineers are also crazy. But man, that just doesn't seem that probable to me. Should we say whose offices we're in?

• 1:03:59Patrick O'Shaughnessy?

  Yeah, we're sitting in the

• 1:04:00Speaker 02

  We're sitting in the Benchmark offices. Yes, this is their famous table for their famous dinners. So thank you, Benchmark. Thank you, Benchmark, for this episode. Yes. Thanks, Eric. And we should think of all.

• 1:04:12Patrick O'Shaughnessy?

  Eric coordinated for me, so he gets a special shout out.

• 1:04:14Speaker 02

  Thank you.

• 1:04:14Patrick O'Shaughnessy?

  Thank you all the partners.

• 1:04:15Speaker 02

  Thank you, Eric. But I mean, we will see where all of these stocks are in a year. The great thing is, time will tell. People are going to be right or wrong. The future's probabilistic, but it's an exciting moment.

• 1:04:29Patrick O'Shaughnessy?

  Well, if we keep doing this on the model release cycle, I'll see you in a couple weeks.

• 1:04:33Speaker 02

  Yeah, it's crazy.

• 1:04:34Patrick O'Shaughnessy?

  Maybe you're going to Benchmark. That's always a blast to do with you.

• 1:04:38Patrick O'Shaughnessy?

  If you enjoyed this episode, visit colossus.com. You'll find every episode of this podcast complete with hand edited transcripts. You can also subscribe to Colossus, our quarterly print, digital and private audio publication, featuring in-depth profiles of the founders, investors and companies that we admire most. Learn more at colossus.com/subscribe.

• 1:05:17Patrick O'Shaughnessy?

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