The $3.5T Bailout: Elon's Plan To Merge Tesla And SpaceX

Scott Galloway and Ed Elson break down why Elon Musk is considering a merger between SpaceX and Tesla, what a deal could look like, and the hurdles it would face. Scott also explains the existential threat he believes both companies are up against. Then, they examine the growing challenges facing the AI buildout, including why some chips are sitting idle in warehouses and whether investors have priced in the risks. Check out Ramp’s AI Index here Subscribe to the Prof G Markets Youtube Channel Subscribe to the Prof G Markets newsletter Order "Notes on Being a Man," out now Note: We may earn revenue from some of the links we provide. Follow the podcast across socials @profgmarkets Follow Scott on Instagram Follow Ed on Instagram, X and Substack Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

• 0:00Speaker 00

  Support for the show comes from Morgan Stanley's podcast, Hard Lessons. Some investing lessons only become clear after you see how a call plays out. On Hard Lessons, iconic investors sit down with Morgan Stanley leaders to go behind the scenes on the critical moments, both successes and setbacks that shaped who they are today. Watch or listen to Hard Lessons wherever you get your podcasts.

• 0:23Speaker 01

  Support for the show comes from AlphaSpace by Yahoo Finance. AlphaSpace by Yahoo Finance is the advanced investing platform you've been waiting for. My co-host Scott Galloway is a fan of the platform. Here is what he had to say.

• 0:37Speaker 00

  So I have been using Yahoo Finance as my portal for finance for, I'm not exaggerating, about 30 years. I think they do a great job.

• 0:46Speaker 01

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• 1:14Speaker 02

  Great meeting. Who took notes? Anyone?

• 1:18Speaker 03

  With Monday Note Taker, the meeting ends and the plan already exists. Action items, owners, deadlines. Go to monday.com, the AI workspace platform.

• 1:28Speaker 00

  Today's number, $750 billion. That's how much Meta, Amazon, Microsoft, and Alphabet are expected to vote to capital expenditures this year alone. That's more than the entire GDPs of Ireland or Belgium. Ed, true story, I decided to sell my homemade bagpipes made from colostomy bags on Amazon, but it sounded like shit.

• 2:02Speaker 00

  How are you, Ed?

• 2:02Speaker 01

  I'm doing very well. Very happy after that Signal win. We won in three categories.

• 2:08Speaker 00

  Yes.

• 2:09Speaker 01

  Big news.

• 2:10Speaker 00

  And tell the fans, what did you, what did you win in? Or what did we win in, I should say. It's a team effort, you little prima donna diva bitch. What did you win?

• 2:19Speaker 01

  Prof G Markets won Best Money and Finance Podcast. So thank you for casting your votes in that. Also Daily Podcast, thank you for that as well. And then my newsletter won Best Newsletter. So very excited about that. The only category in which our show did not win was Best Video Podcast, but that's okay. We'll get it next time.

• 2:42Speaker 00

  Congratulations to you, to Claire. Who else is on this Joey Bag of Donuts cruise ship?

• 2:49Speaker 01

  Dan, Mia, Kristen, video team, Allison.

• 2:54Speaker 00

  Yeah, quite a few people here. Definitely see layoffs coming. I mean, great effort. Great effort.

• 3:01Speaker 01

  We can be leaner.

• 3:02Speaker 00

  Great effort. AI, let's, can AI do, that's my favorite thing that I say to Catherine. I'm like, can AI do this?

• 3:08Speaker 01

  Can AI do it?

• 3:08Speaker 00

  Can AI do it? What else is going on? Anything else good?

• 3:11Speaker 01

  Well, I saw the Nathan Fielder movie, which everyone's talking about. Have you seen it yet?

• 3:14Speaker 00

  I just, she freaks me out. It's like, I don't want to go see a movie about the clown from It. She just whigs me out. I don't, I find her frightening.

• 3:21Speaker 01

  So you're not going to see it? Or what's the plan here? Because you kind of have to see it.

• 3:25Speaker 00

  I'm going to wait till it comes out on streaming. Tell us about it. What's your official?

• 3:29Speaker 01

  It was great. I have a couple of criticisms, but it's not as fun if you haven't seen it. So go see it and then you and I will have sort of a breakdown of, of the movie. But it was, it was fascinating. And she is extremely, an extremely interesting person and kind of a metaphor for our time, I would say. And he really got that out of her. So you should see it.

• 3:55Speaker 00

  Why is she a metaphor? I'll ask. Why is she a metaphor for our time?

• 3:58Speaker 01

  Well, because she's kind of the quintessential tech founder slash grifter who kind of got away with convincing huge amounts of people with a lot of money that what she was doing was legit. And then you see in the conversations that she, she truly is lying. Or at least that is my take. It's sort of up for debate at the end of the movie. But again, you know, you gotta go see it and then you and I can have the conversation.

• 4:28Speaker 00

  I think me getting hair plods and turkey and buying a Porsche are sort of the metaphor for the age.

• 4:35Speaker 01

  That too. There are plenty of, plenty of things that mark our time. Are you going to see the Zuckerberg movie? So we got, we got Zuckerberg movie, Elon Musk movie, which Cara is in. And then we have Sam Altman movie coming out in December. So we got four big tech founder movies.

• 4:56Speaker 00

  I'll see the, the Sorkin one, because I just like him and I really enjoyed the first one. And I want to see what happens in part two. Although I'm traumatized from seeing Sex and the City 2. I don't think I can ever see a sequel again. God, I'm so bad. And I'm a Sex and the City girl, Ed. I didn't know if you know that about me.

• 5:18Speaker 01

  I did not know that.

• 5:19Speaker 00

  I can't see the Musk one. It's four hours. I just can't do that. Did you see How to Rob a Bank?

• 5:24Speaker 01

  No. What's that?

• 5:25Speaker 00

  I'm in that.

• 5:26Speaker 01

  Really? What is, I'm not, I'm not aware of this.

• 5:28Speaker 00

  I'm playing me, although they called me back and said, we'd like to get a Signal award-winning podcaster to do the next one. Yeah, it's with Pete Davidson.

• 5:37Speaker 01

  What is How to Rob a Bank?

• 5:38Speaker 00

  It's a movie about a bunch of kids who, it kind of touches on income inequality and a lack of opportunity for young men. And these young men start robbing banks, or actually a young crew start robbing banks, and they start posting videos on How to Rob Banks on YouTube. It's actually, it's actually a pretty good film.

• 5:54Speaker 01

  And this just came out?

• 5:55Speaker 00

  Is it out? I should know that, shouldn't I? The only movie I'm going to go see in the theaters is the new Ali G movie. I'm going to go see that. I'm going to take my boys to that. We're excited about that.

• 6:04Speaker 01

  Interesting. Okay.

• 6:05Speaker 00

  I'm excited about that.

• 6:07Speaker 01

  Okay. Well, we have a lot to get into. And by the way, if you like this show, please be sure to hit follow wherever you're listening or subscribe to us on YouTube and also hit the bell icon, which gets notifications for all of our latest episodes. We appreciate it. It means a lot. Thank you very much. And with that, let's get into our show.

• 6:27Speaker 04

  Now it's been time to buy. I hope you have plenty of the quail at all.

• 6:34Speaker 01

  Last week, Elon Musk's two biggest companies delivered very different results. Tesla's revenue was flat year over year, while its automotive business continued to struggle. Both auto revenue and deliveries fell compared with a year earlier. SpaceX, meanwhile, had a very strong quarter. Revenue surged 161% year over year. Profits beat expectations and capital expenditures came in slightly below what investors had anticipated. But the biggest story wasn't in either company's earnings. Musk officially confirmed that special committees at Tesla and SpaceX are evaluating a potential merger between the two companies. And investors are increasingly betting that a deal will happen. On Kalshi,

• 7:18Speaker 01

  the odds of a Tesla SpaceX merger before 2028 have climbed to 81%. So Scott, we can talk about the earnings, but to be honest, the merger seems more relevant and more important here. Elon has confirmed that both boards have formed these special committees to study potentially pursuing this merger. Elon said last week, quote, "I do think there's a lot of merit to combining the companies as we are pretty much in the superintelligence singularity, and there is a lot to be gained from cooperating." And as I mentioned, the odds that this happens before 2028, at least according to prediction markets traders,

• 8:00Speaker 01

  is 81%. So this seems very, very likely that this is going to happen. SpaceX is a $2 trillion company. Tesla is a one and a half trillion dollar company. Combined, I guess it'll be a three and a half trillion dollar company. What do you make of this?

• 8:14Speaker 00

  Well, I think actually Kalshi has this wrong. I think there's an 80% chance it'll get approved by the board. I mean, the board is sort of a, you know, the board is doing a lot of work here. And that is, when you're talking about decisions involving SpaceX or Tesla, the bride, the groom, and the efficient are the same person. And that is, this is just a formality so he can check an SEC box. Having said that, I think a real existential risk, and we'll circle back to this, to Elon Musk, SpaceX, and Tesla, is I think on November the 4th, if Democrats take the House and the Senate, I just can't imagine the number of subpoenas and calls to testify before Congress that Musk is going to, is going

• 8:56Speaker 00

  to receive. I think that there is bipartisan anger around him throttling back Starlink in Ukraine and potentially, you know, neutering at the worst possible time the defense of the West. But anyways, so his board will approve it. And I think most likely it does go through. But let's talk about kind of the winners and losers here. The way I would describe it is they're both rocket ships. But SpaceX is busting into outer orbit and Tesla, there's, feels like there's a decent chance one of the O-rings is about to come off. SpaceX revenue is up 161% with net income of $4.4 billion and a 60% EBITDA margin.

• 9:36Speaker 00

  Tesla's revenue was flat and operating income is down 56% with a 2.6% margin and deliveries are down 2%. So what you have is a company, you have an automobile company, you pointed this out yesterday, that's trading at a P of 300 versus an industry at 18. And this is effectively what's going on here. Musk has this, he's a genius on several levels, but something he really understands is

• 10:06Speaker 00

  So back to Sex and the City. Carrie is dating Michelle Baryshnikov. I'd have to forget the character's name. And she meets with, and he's constantly kind of putting her off and never has time for it. And he's like, as soon as my art show is over, we'll do this. And he meets with Mikhail Baryshnikov's former lover and says, why did you break up? And she said, I got sick of as soon as. And she kept saying, as soon as this happens, this will happen. Musk is literally the genius of as soon as. Okay, I have a better EV. It's going to change the world. Wow. All right. No, other people are coming to the EV market. It's a shitty low margin company. Wait, we're going to have autonomous. As soon as we have autonomous, I'll be able to justify this valuation.

• 10:51Speaker 00

  Okay, you're making no progress in autonomous. Waymo's doing a half a million rides a week. You're doing very few with a safety monitor in the front seat. Okay, as soon as we produce 5 million robots. Everyone is running out of patience with this boyfriend called Tesla. So he is going to merge it into a company that distinct the valuation, which I would argue is irrational, really has an incredible story. So he's taking shareholders who are getting 2.9 million of cap of market cap per car. And I think that is really tenuous. And he's putting it into a company that has, quite frankly, a more enduring, sexier story.

• 11:36Speaker 00

  Now, to be fair, there are some real synergies here. SpaceX has purchased more than 1 billion of Tesla batteries and more than 100 million of Cybertrucks, although I would argue that's a related party transaction. Tesla knows how to manufacture at scale. And SpaceX has compute that self-driving needs. It's a real merger with a fake promise. When Musk merges something into another, it's an acknowledgement that it's about to crater. When he, he bailed out a company he chaired, but that was owned by his cousins. I think it was called SolarCity. And he bailed it out by stuffing it into Tesla. He stuffed Twitter into XAI, which then got folded into SpaceX. His M&A strategy is simple.

• 12:18Speaker 00

  When one of his kids are failing, he makes another family adopt it. So right now Tesla is the patient and SpaceX is the organ donor. SpaceX shareholders are the organ donor. So who wins? Tesla shareholders, they get to trade a declining shares in a declining car company for a stake in Starlink and AI. That's like trading, you know, your Buick for a piece of a Gulfstream. And he wins because he's going to get to maintain control. Largest merger ever, bigger than the GDP of France. But again, I think this is more, he keeps pulling more and more rabbits out of the hat. And he needs a new one for Tesla. And that new rabbit is SpaceX. Your thoughts?

• 13:03Speaker 01

  I think that's exactly right. I mean, you look at Tesla stock, it's down 13% in the past year. People, people love to say Tesla's been like such a great investment, but over the past five or six years, it actually hasn't. When you just look at the five-year timeframe, it's actually underperformed the S and P by about three times. So this is a stock that has been lagging in recent years. And it's because the business is actually in decline. It's because revenue is falling. It just fell again last quarter. The car deliveries just fell as well. The, the story that people are excited about is the robot taxi. But as we also know, the robot taxi is like millions of miles behind Waymo,

• 13:48Speaker 01

  which is the winner and the, and, and the frontrunner in this race. And it's not even close. So the story for Tesla is certainly coming under a lot of pressure. And I think you're exactly right. The, the adoption analogy is perfect. It's like, I kind of think of it as sort of brand laundering, or maybe even multiple laundering, where you have SpaceX, which currently has a sexy story about satellites in space, or excuse me, data centers in space, orbital data centers. They already have the satellites in space. The next story is the orbital data centers. The story after that is the asteroid mining. The story after that is creating colonies on Mars. So he's creating all of these stories.

• 14:32Speaker 01

  And currently investors are kind of lapping it up. Because you've got, I mean, Tesla, we already believe, you and I agree that we think that Tesla is way overvalued, trading at, you know, more than 300 times earnings than the average across the auto industry is 17. Now, we can't do that with SpaceX because they don't have earnings, but we can look at the price to sales multiple. Tesla's trading 14 times sales. SpaceX is trading at 87 times sales. So he's kind of doing the same thing again. Okay, let's put them all in the same bucket together. And maybe we'll, people will stop asking questions about why are cars, car deliveries declining? Why are your sales declining on a quarter of a quarter basis? Why is this happening? Maybe they'll stop asking those questions.

• 15:17Speaker 01

  And they'll say, oh, well, that doesn't matter because the main thing, the main prize is the asteroids, or it's the AI, or it's renting out the data centers. And to be honest, like, it's, it's not a terrible argument to make. It just means that you're kind of, as you often say, smearing the Vaseline over the lens so that we don't actually have to dig into the reality. And as you point out, he's done this plenty of times before. He did it with SolarCity. He did it with Twitter. He did it with XAI. I mean, you remember, we used to actually see all of the financial details of Twitter. We saw how many, how much user growth was increasing or decreasing. Like, we had all of those details. Then suddenly it's bought up by XAI. And suddenly we don't really get that level of detail.

• 16:01Speaker 01

  Like, you know, technically that company is part of SpaceX. And we don't really get to see what the revenues actually look like, what the financials look like, because it doesn't really matter anymore to the story of the business. So it does seem like that is pretty much the game plan here. We're going to distract away from the fact that Tesla is seemingly in structural decline, at least when you look at its core business. Who knows what happens with the robot taxi? But SpaceX is, is the sexy, hot, new AI company.

• 16:30Speaker 00

  Look, a brand, if you will, is one part promise, one part performance. And Elon Musk has become the master, the Jedi knight, the, you know, the sensei of promise. And the moment the performance begins to catch up to the promise, he shoves it in another vehicle with more promise. And also, there's a lesson to be learned here. And I say this admiringly, even at a small business. So, so this has been great for Tesla shareholders because, or Tesla, because it creates cheap capital such that he can pull the future forward. I mean, that ridiculous circus act of a flying car with five seconds of thrust,

• 17:15Speaker 00

  that takes five hours to fuel on an empty shell of a car. I mean, that's just, that's not going to happen. And it's, look over here.

• 17:24Speaker 01

  Does that make you bullish when you see that? Like, I see that, and I know that's the idea, is that, oh, look, the car is flying. Look at our engineers. Look how talented they are. But I look at that, I'm like, why are you doing that? Like, why are you spending money on that?

• 17:40Speaker 00

  No, he's running out of rabbits. And he did it, notice how he did it two days before the earnings call, where they announced that this company trading at 300 times earnings is in structural decline, is flat to down. Anyways, but there is a lesson here, and that is, as a leader of a company, you always want to be painting a promise that's something to reach for. Because it not only gets, quote unquote, the markets excited, and we don't have shareholders other, other than the employees, but you want to give the employees something to think, okay, we have a vision here. We're moving towards something bigger that will make the company worth more and is exciting to work on. I think you always want to be, I loved, I think it was Al Pacino said, what is God if not grasping beyond your reach?

• 18:25Speaker 00

  You always, as a leader, want to be a little bit, I don't want to call it not godlike, but give people something, say, okay, this is what we're going to reach for next year. He has done that like no one in history. And he also has a great sense for, okay, when do people, when do people start figuring out that I'm full of shit? And that there aren't going to be, there likely won't be, I won't be producing 5 million robots a year. And then my autonomous is just not living up to expectations. I know, shove it into the rocket thing because that's going very well. But there, you do a little bit.

• 19:04Speaker 00

  And I'm sure the movie you referenced has some of this. There's a pretty thin line between being a visionary and committing outright fraud. And that is if you can paint an extraordinary enough a vision and you are credible. And to be fair, he keeps delivering for shareholders. Shareholders shareholders want him to continue to do this. I'm a Tesla shareholder. Oh, God, this does feel kind of scary. Oh, wait, I'm going to own SpaceX. Great. And then he can stare down the SpaceX shareholders, who I believe are on the wrong side of this deal and say, bitches, I have always delivered and I will continue to deliver. And this is the reason why we're doing this. It's going to add a lot of type line revenue. It's going to add a lot of manufacturing scale.

• 19:44Speaker 00

  But the idea of a brand being promised versus performance, he exudes, no one has ever had a greater ratio of promise to performance, even distinctive as incredible accomplishments, than Elon Musk.

• 19:58Speaker 01

  So I totally agree. I do think, though, that this isn't necessarily good for Tesla shareholders. And

• 20:07Speaker 00

  I think that's right.

• 20:08Speaker 01

  We should just discuss like how this merger would actually work. Like, how would these two things come together? What would probably happen is that SpaceX would acquire Tesla and they would offer Tesla investors SpaceX stock. And then Tesla shareholders will convert their existing Tesla shares into SpaceX shares. The price will be determined by the boards. It's expected or RBC predicts that Tesla shareholders will get a 20 to 30% premium. So you might think, oh, that's good. Like, you get paid more than it's currently trading at right now. You're going to get rich, but you also have to remember that the currency is going to be the SpaceX shares.

• 20:50Speaker 01

  And the price of those shares is based on whatever the current market value of SpaceX is. So, you know, your shares will convert and you'll look like you're 20% rich. You're like, oh, my God, that's great. But then if SpaceX stock falls by 20% the next day, then you're not actually getting a premium. And my view is that that that could very, very easily happen. And the reason I think that is because I think the SpaceX valuation is basically bullshit. And the reason it's bullshit is because the float is still incredibly small. It's still around 15 to 20%. And you look at a company like Nvidia or Microsoft, these actual multi-trillion dollar companies, they have floats of almost 100%. All of their shares are trading.

• 21:31Speaker 01

  And so the SpaceX shares right now are not experiencing genuine price discovery because only a fraction of them are actually being publicly traded. And the smaller the float, the more you can manipulate the price with extremely large shareholders. And we have every reason to believe that that is happening, especially for this company, which is saying it's going to raise hundreds of billions more dollars in the future, which is why I believe all of the investment banks are pumping up the price in their investment research, such that they have a better chance of underwriting these debt and equity offerings that are going to come down. The pipeline, which is exactly how the investment banks make money. And, you know, I get that that right there is kind of a conspiracy theory, but I do

• 22:12Speaker 01

  believe it's true, especially considering what we saw last year with the SEC eliminated the one law that was designed to prevent this conflict of interest from happening. So now I see this happening. They got rid of the law. It's like, yeah, I think that these price targets from these banks are total bullshit. I think it's ridiculous that Raymond James is saying that SpaceX is worth $10 trillion today. So I believe that the price is being extremely inflated right now. I think it's being manipulated. And Elon is deciding, okay, now that my shares, my, these SpaceX shares are worth, saying that this company is worth $2 trillion, even though that is a bullshit number, in my personal view, I'm going to use that as currency to go out and buy Tesla.

• 22:55Speaker 01

  And the ultimate reason why I think that he is doing this, one is the multiple and the brand laundering. But I think the biggest reason is that this is going to consolidate massive amounts of power. And that is that SpaceX has a dual-class shareholder structure. Elon has 80% of the votes. Tesla does not. He only has around 20%. And this is why he's had problems when there have been shareholder lawsuits and he's tried to reincorporate the company in Texas. And he was able to kind of get around some of those things and bend the company to his will, but ultimately he only has 20% of the votes. But by converting Tesla stock into SpaceX, and they're going to use the non-voting SpaceX

• 23:38Speaker 01

  shares as currency here, that is my prediction, he is going to eliminate essentially all of the shareholder protections that have gotten in the way of him doing whatever he wants at Tesla. So it's going to basically mean that he has 80% control over this entire merged corporation, whereas before he only had 20% of Tesla. So this essentially just gives him more power. It consolidates more of the influence into his hands. I think that that is his ultimate goal. And he said this before. He says he doesn't like being a public company because it means he has to deal with shareholders and shareholder lawsuits. That's why he moved from Delaware to Texas. This is like his whole thing. So ultimately, what it means for Tesla shareholders, I think, is you're giving up your voting

• 24:22Speaker 01

  rights once you do this. And I think that's definitely going to happen. And then also, you're buying into a company whose $2 trillion valuation is extremely precarious right now and based on what I believe is a lot of financial manipulation.

• 24:43Speaker 01

  We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify, or wherever you get your podcasts.

• 25:00Speaker 00

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• 28:03Speaker 01

  We're back with Prof G Markets.

• 28:05Speaker 00

  The governance gymnastics or the shareholder dynamics or the physics says that he gets control of both companies. I think that's a free gift with purchase here and not, not the reason he's trying to do this. I think the reason he's doing this is he wants to stay close to being a trillionaire and he realizes that Tesla is on its eighth of nine lives in terms of trading at 300 times earnings. It's just, you know, the roadster originally promised, announced in 2017, delayed four times. I mean, they're just kind of out of magic tricks here. They're out, they're out of distractions and what he'll be able to do here. And I mean, okay, it's like in the world of bullshit, pick your fighter Bernie

• 28:49Speaker 00

  Madoff or Elizabeth Holmes in terms of valuation here. I get why you would say, and we've said this, that SpaceX is dramatically overvalued, but SpaceX still has the promise of Tesla has no modes. BYD is making a better Tesla for half the price. The entire rest of the world has 8% of the launch payload capacity right now. There, I can tell you personally, there is nothing like Starlink. Nothing. I think there will be eventually, but there's nothing like it. XAI, the AI portion of SpaceX is up nine X. Now granted, it's off

• 29:28Speaker 00

  a small base, but that story has legs. The Tesla story is running out of steam. It's like, I feel like it's one of those, those TikToks you see of the guy in the 26 mile who collapses and this great guy who would have won the silver medal picks him up and we're all like, oh, well done. Yeah, this, they're in a triathlon and Tesla is out of, out of steam here because, and when you talk about governance, oh, he'll get control. For God's sakes, he committed securities fraud at Tesla and the board didn't even kick him up to chairman for a week and then make him see.

• 30:06Speaker 01

  They gave him a trillion dollars off.

• 30:07Speaker 00

  Yeah. So the notion that Musk isn't in charge of Tesla is, I mean, maybe, maybe it makes it harder for shareholder lawsuits, but be clear. I mean, he, there can only be one and he sits on the iron throne. The board members aren't even allowed to, I don't even know who's on the board. They're not even allowed to talk.

• 30:25Speaker 01

  It's like his brother. Yeah.

• 30:26Speaker 00

  Yeah. So basically he puts him on the board and says, bitch, I'm going to make you rich. And occasionally you can, you know, you're going to come, come, come to product demos and you're going to make a bunch of money, but be clear, you're not a fiduciary for shareholders. You're a fiduciary for Elon Musk. Anyways, the governance is not the motivation here. It's a free, he's like, while we're at it, let's make sure I'm in control of both companies legally and not just practically.

• 30:50Speaker 01

  But it's something that Tesla shareholders technically lose. And I think this, this is my view is like, I can see how Tesla shareholders might feel that they're getting a good deal, but I think we should be real about all of the ways in which they're also getting screwed and all of the ways in which the, the, the bag that they're going to be holding is equally premised on BS narratives about the future. Like the gift that he's giving them is their current narrative, BS narrative about humanoid robots. That one is running out of steam and people aren't buying it anymore. And so he's doing this grand kind gesture of, okay, here's another narrative, which is also BS, but it's just

• 31:31Speaker 01

  newer. And so it's more exciting. And also I think it's financially manipulated because the float is so small. So it's easier to pull off this circus act. But to me, it's like, okay, I, I can see how that will be, that might be good for shareholders in the short term, but ultimately I think you're running into the same problem, which is like, this is still a bunch of bullshit. Like this is still a bunch of, you know, as you said, pulling rabbits out of the hat that, you know, God bless Elon Musk for finding another rabbit. I'm just going to propose my, my final little conspiracy here. I was thinking about this, like, okay, we're all Tesla shareholders because we all own the S and P.

• 32:16Speaker 01

  So I own Tesla whether I like it or not. What's going to happen to my Tesla shares when they get acquired by SpaceX? I mean, for one, I'm immediately, those shares, I mean, the S and, we'll see what the S and P will do about it. Sometimes what the S and P does is they remove it from the index, but I think this is worth really digging into because my new conspiracy theory is that I think that this might be his way of fast tracking SpaceX into the S and P, which currently it cannot join because the S and P has these strict laws on profitability, on the float requirements, on how long you've been trading publicly, all of these things which make SpaceX not eligible for index

• 33:00Speaker 01

  inclusion, and it won't be for quite some time. Of course, they got included in the NASDAQ because they cut a deal with the NASDAQ and they decided to change the rules, but everyone was, was kind of breathed a sigh of relief when the S and P came out and said, we're not going to include SpaceX. But I just want to read to you one of the exceptions to the rules. And this is, I'm quoting from the S and P's bylaws, quote, "Non-S and P composite companies that acquire S and P composite index constituents, but do not fully meet all of the eligibility criteria, may still be added to the S and P index at the discretion of the committee if the merger consideration includes the acquiring company issuing stock to target company shareholders," which is exactly what's

• 33:42Speaker 01

  going to happen, "and the committee determines that the addition could mitigate turnover and enhance the representativeness of the index as a market benchmark." In other words, there is an exception to the rule, which is you might not be profitable, you might have an artificially low float, you might not have been trading for very long, but if you are large enough to go in and acquire another company that is systemic to the S and P, which Tesla is, then the S and P committee has the right to say, okay, that's good enough and we're going to include you. So I could see this turning into the, the grand circus act of Elon's going to acquire this company and that way SpaceX is included

• 34:23Speaker 01

  in the index and then none of us have a choice. We all own SpaceX, which puts enormous amounts of buying pressure on the stock, which artificially inflates the price even more. I know I'm being conspiratorial and I'm open to that not being the case, but honestly, given Elon's track record, I genuinely think that that is going to happen here.

• 34:43Speaker 00

  Well, JP Morgan said that a stock for stock merger could give the S and P committee grounds to make exceptions to some eligibility rules, right? Cause you noted that you're supposed to trade for 12 months.

• 34:53Speaker 01

  And other laws, other restrictions, which they don't meet.

• 34:55Speaker 00

  And other restrictions, you have float, et cetera. And JP Morgan also estimated that inclusion would create a passive buying equal to about 10% of the combined company's free float, which is real. Now, what you said that I don't, and I don't know the mechanics of this, but I think this is going to be a merger, not an acquisition in the sense that the special committees, so you form a special committee and the special committee is supposed to do real work with the investment bank to say, does this make sense? Can we justify it? What happens if this goes wrong? Are, is the CEO just building an empire? CEOs have a tendency to want to do acquisitions. Why? Because their compensation is driven by a compensation committee on the board that hires Towers Perin because we don't

• 35:38Speaker 00

  like to do any actual real work. And Towers Perin, who we paid $200,000, comes in and says, okay, Janet Robinson is the CEO of $5 billion media company. And on average, the CEO of a $5 billion media company makes eight million a year. And then what happens is we go, well, Janet's a good person and she's working hard. We don't want to pay her 50%. We'll pay her 60%, which doesn't sound like a lot. But when you're paying 20% above the mean every year, what that means is every three or four years, CEO compensation is doubling and is the reason why in the last 40 years, CEO compensation has gone from 30 times the worker to like 600.

• 36:15Speaker 01

  Great.

• 36:16Speaker 00

  Yeah. Well, it's just been totally out of control. So my point is there's an incentive to make acquisitions, even when they don't make any sense. And every CEO is hoping for a transformative acquisition, like what Zuckerberg did with Instagram. The reality is about seven to 10 acquisitions end up destroying shareholder value. Now, if I'm on a special committee representing SpaceX shareholders, I'm like, okay, they're making an argument around scale. The company has manufacturing, supply chain expertise. It's going to give us a lot of top line revenue. All right. But Jesus Christ, 300 times earnings? And wait, you want me to pay a premium? Fuck you. I mean, no, I, I think they're going to have, I, I think the special committee at Tesla is going to have a lot more eye

• 37:01Speaker 00

  rolling at current valuations. They're going to say, our total addressable market is the universe, is the galaxy and, you know, go on the list, all the things I'm talking about. And we're paying 300 times for a company that's revenue was, growth is flat. So, and you want us, you want us to pay a premium because supposedly we're on top here and we're the acquirer?

• 37:25Speaker 01

  You're saying, sorry, the SpaceX board is going to roll their eyes.

• 37:28Speaker 00

  Excuse me. The SpaceX board, I think if any, if any special committee.

• 37:32Speaker 01

  Of which, by the way, he has 80% of the voting power. So.

• 37:35Speaker 00

  Assuming these guys want to write a report such that they're at least defensible in court, you know, in assuming these, these people actually do their job and are counseled by anybody, they're going to go.

• 37:46Speaker 01

  Why do you think that? They don't, I mean, we saw what they said in court. They don't, they, they don't have a spine, right? I mean, that was Tesla that we saw.

• 37:54Speaker 00

  Okay. Stock price. The day after it starts trading as a combined company, right? It's SpaceX is, okay, SpaceX, you not only overpaid, you grossly overpaid, right? So I just don't, I think they're probably going to end up in just a like for like, like what is the share price on the day of closing? And we do a like for like exchange. I don't see why SpaceX would pay a, and part, part of what you do on a special committee is you do benchmarking. You say, okay, the first benchmark is what would someone else pay for Tesla? And the answer is they pay 30 cents on the dollar. There is no one out there that would even pay the current price, much less a premium. Who on earth, who, Apple?

• 38:36Speaker 00

  Would Apple pay? Apple for a premium? What is Tesla at? 1.4 trillion or something? What would? Apple is literally like the, probably the only company viable competitor or viable acquirer from Tesla. Tesla has a 1.5 trillion. They would have to pay $2 trillion. They're going to take a 30 or 40% dilution to buy Tesla? No, they would never do that. So the special committee, if they do anything, and the special committee owns shares of SpaceX. So they do have a vested interest. My point is, I don't think there's any way Tesla is going to be able to argue on any level and also not create a fairly significant ugly

• 39:18Speaker 00

  hangover the first day this starts trading as a post, as a wind up. Now, having said all of this, Ed, I think this all may be moot. I think the wolves are coming for this guy. And when I say this guy, I don't mean these companies. I mean, this guy. I think there are so many elected representatives who will be hitting subcommittees on commerce, defense, intelligence. They're going to go, let me get this. This guy was throttling back Starlink as inbound projectiles from Russia came in? Bitch, you have some splaining

• 39:58Speaker 00

  to do. Oh, and by the way, you want us, you want, you want us to not to approve or not have CFIUS reviews up your ass and all sorts of antitrust up your ass?

• 40:09Speaker 01

  And just, just to clarify for listeners, what you're referring to is what we heard last week, which is that in Ukraine, their drones which rely on Starlink and Starshield, which are SpaceX products, their drones started falling out of the sky because Starlink just was turned off randomly. And reports say that it was Elon who did this. That is what the Wall Street Journal has been reporting on. But Elon's saying, oh, no, I don't make these decisions. This was a decision by the government. And then Trump came out and said, I didn't, I wasn't responsible for this. So everyone's kind of pointing fingers as to like, who, who was responsible for this decision. But it's clear, I mean, at least to me, I mean, read between the lines, however you'd like, seems to me like Elon,

• 40:53Speaker 01

  who has expressed that he doesn't want to be seen as someone who's providing protection for Ukraine in a war, who I believe has criticized Zelensky publicly.

• 41:04Speaker 00

  Zelensky has gone too far, was his tweet from two weeks ago.

• 41:08Speaker 01

  Right. So the idea that it wasn't Elon Musk who turned those things off seems to be a little bit ridiculous, especially given his track record of lying. So you're pointing out like, you know, that's worth an investigation. Is Elon Musk controlling the trajectory of geopolitical warfare, a war in which we're supposed to be defending our ally in Ukraine? Is he controlling that trajectory and then denying it? In which case, does that warrant review? Does that warrant congressional testimony? Probably, probably warrants a federal investigation.

• 41:41Speaker 00

  These guys are going to ask this guy to put his elbows in the table and cough for the next four years. They're going to probe him like, he's going to wish he could go for a five-year colonoscopy versus what's about to happen to him because-

• 41:55Speaker 01

  Can I just clarify, like, because you're saying that, you know, Democrats are going to investigate him. He's going to be having his arms over the table coughing.

• 42:03Speaker 00

  Elbows.

• 42:03Speaker 01

  I know, elbows.

• 42:05Speaker 00

  By the way, which means you haven't had your prostate checked. It's never too early to start, Ed. It's never too early to start.

• 42:11Speaker 01

  Elbows. So, because I saw that Kara Swisher said something similar on the Bulwark, where she was like, you know, this guy might go to prison. And I know that she's getting a lot of flak and a lot of-

• 42:25Speaker 00

  Let's be clear. She said that he'll be investigated.

• 42:27Speaker 01

  He'll be investigated. Okay. Well, she's getting criticized for suggesting that we use political power and when the Democrats take over, we just investigate people and send them to prison. And that's how Elon has responded to her. And he said like, okay, game on essentially. And it's, it's flaring up into kind of like a pretty intense and nasty political debate. The criticism of her was, what are you investigating him for? What is the problem? Or are you just saying, I don't like Elon Musk, let's investigate him and let's send him to prison? I know that's, I don't think that's what she's saying. But for you here, what do you think that he is going to be investigated for that will

• 43:09Speaker 01

  warrant bringing him in for congressional testimony? I think that the Ukraine thing is certainly something. That seems pretty bad. But is there anything else that you're referring to?

• 43:19Speaker 00

  He is a traitor to the West. A traitor. And to think that he's not going to be, have a full fucking body cavity search around the decision-making and how on earth in a democracy, we let an unelected official decide geopolitical strategy and battlefield technology that threatens the sanctity of the West from an unelected megalomaniac who sleeps with a loaded gun next to his bed, who's addicted to ketamine? Let me repeat. Elon Musk is a traitor to the West. Your thoughts, Ed?

• 43:59Speaker 01

  I agree. I agree. I just wanted to clarify. I think the other thing that he could be brought in for is what he did with Doge and USAID. I mean, that's, that's an investigation waiting to happen. The argument that is unfolding is that, is that they're going to say this is lawfare. You're using political power to pursue investigations wrongfully. And then, you know, the Democrats will say, no, this is us using political power to pursue investigations correctly and righteously. And the question is-

• 44:31Speaker 00

  He may not be guilty of anything. I'm not sure he's even broken any laws.

• 44:34Speaker 01

  Right.

• 44:34Speaker 00

  But, but-

• 44:35Speaker 01

  But he's going to get hauled in front of Congress to explain his actions. Exactly. I mean, the idea that he's not going to be held to account at all for what has happened with the Ukraine-Starlink situation, that he thinks that he can basically just say, oh, I didn't know why that happened. I thought that the President of the United States was responsible for that. And that'll be the end of it. When you're Elon Musk and you're worth a trillion dollars and you have control over companies that were three and a half trillion dollars combined, and you spent $366 million on the midterms, after saying you weren't going to spend any money on the political midterms that you were done with politics, and after you spent all this money on Doge, which was a disaster and got shut down. So, yeah, I'm with you. I just wanted to hear a clarification because I

• 45:16Speaker 01

  know what the pushback is. They're going to say the libtods, Kara Swisher and Scott Galloway are willy-nilly accusing Elon Musk of being a criminal and saying he should go to prison for no reason whatsoever. And I just want to clarify that there is reason.

• 45:33Speaker 00

  I don't know if he's a criminal. I'm comfortable calling him a traitor to the West. And by the way, I don't think he could have done this without Trump's probably implicit approval. I think Trump's lying. I think they both, I think they're co-conspirators around this Ukraine thing.

• 45:46Speaker 01

  I agree.

• 45:47Speaker 00

  But the bottom line is, he is going to be hauled in front of Congress and then, and if they think a bunch of AGs are just going to rubber stamp and not get in the way of this merger, oh my gosh. There's all sorts of reasons, or quote unquote, legitimate concerns that regulators will have.

• 46:08Speaker 01

  It's going to be such a mess.

• 46:10Speaker 00

  Oh, it's going to be, he is going to be so busy fending off incoming, he's probably smart to be putting $300 million into the Senate races. If the Democrats take control of the Senate-

• 46:20Speaker 01

  366, yeah.

• 46:21Speaker 00

  If I was worth a hundred dollars, I'd put, and I thought, okay, I really don't want Senate chairs calling me in front of the Intelligence Committee and the, and the Commerce Committee, whatever it might be. I'll spend 30 cents to see if I can reduce the likelihood of that happening. That's what it is. If you're worth a hundred dollars, would you spend 30 cents to try and get political advantage?

• 46:41Speaker 01

  It's no brainer.

• 46:42Speaker 00

  I mean, Gary Stevenson said something so powerful. He said taxes, taxes prevent us from corruption. There are protection against trillionaires amassing too much power. When you can spend $300 million on a whim and basically buy a corrupt senator, or try to with Paxton, why wouldn't you? So you need to tax, we can't have anyone aggregate that much power. It's never worked out. We never look back and think, wow, I wish, I wish Genghis Khan had had more power. We never think that. We never think any individual should have more power. We wish they'd had less. When they aggregate too much power

• 47:25Speaker 00

  and they have no checks and balances, as you could argue right now, two of the three branches of government are no longer check on the president, a check on the president, that's when we get into trouble. But this is, we've spent the last 40 years thinking about how to create wealth. I think we're going to spend the next decade talking about the obligations of wealth.

• 48:04Speaker 00

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• 50:43Speaker 01

  We're back with Prof G Markets. We know the hyperscalers are spending enormous amounts of money on chips to fuel the AI buildout, but new reporting raises questions about how quickly those chips are actually being put to use. According to Business Insider, Amazon is spending billions of dollars a month on Nvidia server racks and GPUs that it cannot immediately install. And as a result, a lot of those racks are sitting in warehouses waiting to be used. That raises a bigger question for investors. If demand for AI infrastructure is so strong, why are so many of these expensive chips sitting idle? Plus, the delays may extend beyond the hardware itself. Since September, eight data center listings have been pulled, postponed, or repriced,

• 51:26Speaker 01

  raising further questions about the pace of construction and the viability of some of these AI projects.

• 51:34Speaker 01

  Okay, Scott, there's so much we can get into here with AI. Just a lot of red flags last week. I mean, there were the IPOs for a lot of these data centers that were either pulled or they were delayed. We had Fermus, which canceled their IPO, SP Energy delayed their IPO, Elise, which is another data center company, they went public and immediately the stock just craters more than 30% on day one, which kind of is a canary in the coal mine for what happens when AI data center companies go public, they don't do very well. We're seeing that the credit markets are souring on AI. We're watching credit default swap spreads exploding every day

• 52:17Speaker 01

  and they're hitting record highs on some of the very big AI names like Oracle. Even Nvidia is rising and CoreWeave, of course, hitting record highs. We have the ramp data showing that corporate token spending is slowing down. And then there was this warehouse story where we don't have many numbers on it, but it's a really interesting and concrete example of maybe the hyperscalers did overbuy because Amazon has a warehouse filled with GPUs and AI chips that were supposed to be generating cash today. That was what we were told, but instead they haven't plugged them in. They're collecting dust and depreciating in real time. It all spells for anxiety in the AI trade.

• 53:01Speaker 01

  Lots to get into, but let's start with your initial reactions.

• 53:03Speaker 00

  I would argue you've been spending a little too much time with Paul Kudrowski and Ed Citron.

• 53:09Speaker 00

  I think we're in the midst of a correction, but not an implosion. And that is, so first off, with respect to the GPUs stacking up in Amazon, which is arguably the best supply chain operator in history.

• 53:23Speaker 00

  The bottleneck has moved from chips to electrons. And so the idea that when there seems to be the scarce resources, chips, and Amazon uses its muscle to stockpile them, thinking that's a smart move. And then we find that the bottleneck is around either power or data centers themselves. I don't think that's that unusual a story.

• 53:42Speaker 01

  Agree.

• 53:43Speaker 00

  And media has, media narratives have a momentum. Everyone gets in favor of something or you can just feel the momentum around what is the narrative. And the narrative right now is that the capex in AI is way out over its skis and there's no way they can get an ROI there and we're going to see a 99 or a 2000-like implosion.

• 54:06Speaker 00

  And part of that narrative I've been reading is that, okay, Anthropic, if you look at their numbers, the media is saying, all right, on 16 billion in revenues, they lost 80 billion. All right, that sounds very scary, but what they failed to say is that 72 of that $80 billion loss was the loss, the accounting loss they have to take because of convertible debt that converts into equity because the equity keeps going up in value. So really, the kind of accurate number is they lost $9 billion on 16 billion in revenue. And I think they 9xed their revenue year on year or something. So I do think these companies, the AI trade or the technology

• 54:49Speaker 00

  is still showing an unprecedented level of velocity, both in terms of revenues and adoption and new products and capital formation. Now, is that not to say there won't be a correction? I agree, there's going to be a correction here. But right now, the narrative is kind of turned into this is so clearly a bubble waiting to pop viciously. And I'm just not sure I buy that. The NeoClouds, Nebius is down 26%, CoreWeave's down 27%, Cypher Digital is off by half. And people are saying that the NeoClouds are kind of the subprime lenders of AI, borrowed money, long-dated promises, and no power.

• 55:31Speaker 00

  But the thing is, everyone's saying there's a glut and a glut, prices and margins fall. And it appears that the opposite is happening. AWS's operating margins rose from 33 to 39%. Google Cloud's operating margins went from 21 to 36. If there was a glut, margins would be collapsing. Instead, they're expanding. There isn't too much supply, there's too little power. And construction delays are obviously really hurting here, but they're normal. They usually, I mean, if you've ever renovated a house, that's what usually happens here. But I think, I mean, what you're hoping for is a bit of a soft landing. And that is these things come down 10, 20, maybe even 50%. But at some point, the revenues, if these companies continue to grow.

• 56:15Speaker 00

  I read Anthropic's S1 and everyone was like, came for them with knives out. And I thought, actually, this business just looks, it's kind of living up to the promise is the way I read it.

• 56:25Speaker 01

  You read the S1 or some of the reporting on the S1?

• 56:29Speaker 00

  Some of the reporting on the S1.

• 56:30Speaker 01

  Yeah, okay.

• 56:31Speaker 00

  I mean, I don't want to read, I didn't want to read 68 pages of like how it's going to destroy humanity.

• 56:37Speaker 01

  The S1 isn't out, right?

• 56:38Speaker 00

  No, but this is, this is what it'll be though. It'll be 50 or 60 pages. I already know what it's going to say. It'll be 50 or 60 pages. The numbers have basically been linked by the bankers. It'll be 50 or 60 pages of the business. And then typically an S1 is, uh, let's describe the business, then let's have a risk section. This will be 50 or 60 pages on the business and 100 pages on the risks. It'll be, usually it's, here's the business and these are the risks of the business. This S1 will be, here's the business and the biggest risk is that the business is so successful, it destroys humanity. It's going to be a very interesting read. It's, I can't, but when I read the numbers that have been leaked or are a result of their latest round

• 57:22Speaker 00

  of valuation, I, I think the media is unfairly characterizing or playing down the success of this company right now. Now, I think there's other threats on the horizon. I'm going to talk more about in my prediction, but um, my sense of, when I talk to people kind of in the know that work at these companies or are investing these companies, they're like, uh, yeah, there's skeptics in the media and then you sit down with them and you see their numbers and their growth and they're just like, we've never seen anything like it.

• 57:48Speaker 01

  Hmm. I disagree with you.

• 57:51Speaker 00

  Go for it.

• 57:51Speaker 01

  Yeah. I actually think the media is not, is not buying into necessarily the, this thing is going to be a disaster. I think when you look at a lot of the reporting, they're actually playing along with a lot of the accounting gymnastics that are making these businesses seem better than they are. I mean, the $80 billion loss, I don't think anyone took that seriously and was like, oh my God, they lost $80 billion. Like everyone knows that there is the giant caveat of the $72 billion write-off. So I think what people are more focused on is the $8 billion or, or the, or the.

• 58:22Speaker 00

  It's not a write-off. It's the way it's accounted for.

• 58:23Speaker 01

  Conversion.

• 58:23Speaker 00

  The convertible debt, the conversion.

• 58:26Speaker 01

  Yes.

• 58:27Speaker 00

  Yeah, it turns to a loss.

• 58:28Speaker 01

  I think what they're focused on is the $8 billion, which i- is a lot of money. And you point out that like, the margins are expanding on these cloud businesses, but yes, but also the free cash flows are getting obliterated and they're now going negative. And the capex, you know, we're not seeing that in the margins because the capex has to get depreciated over time, but you know, Amazon is negative free cash flow, Google, Meta just reported that their earnings, negative free cash flow as well. And, and it's still up for debate, like, will the ROI appear? Will Meta Muse be enough to justify the $145 billion in capital expenditures that they're going to spend this year? And

• 59:11Speaker 01

  as they just told us this week, that might go up to $800 billion over the next few years. So they're going to spend hundreds of billions of dollars and I think it is still an open question as to whether any of that will, will pay off. I think it is a very big one. Where I would agree with you is that when you look at the stock market right now, all of that anxiety, all of that risk, I think is being priced in. And, and you look at the stock performances of some of the names that you just mentioned, Nebius, which is another NeoCloud, down 31% over the past month, CoreWeave down 52% over the past month. The bigger names, Oracle, negative 15%, Micron, negative 18%. The semiconductor

• 59:55Speaker 01

  basket, the whole ETF is down 15% in just the past month. And then you look at the, the multiples on some of these names, like Nvidia, where, you know, its stock has gone up, but its earnings have exploded even higher than the stock. And so essentially what's happened is that the forward earnings multiple has gotten cut in half over the past year. And to me, that is investors saying like, yeah, we know that profits are rising, but we're anxious about the sustainability of these profits. So we're going to discount the future value of this company because we don't think that it's necessarily as reliable as we might've thought a year or two ago. And so that to me is the market saying like, no, we, we get the risks. We understand them. Like I think investors are actually pricing

• 1:00:38Speaker 01

  this stuff in. And I don't think that was necessarily true for a lot of these AI names a year ago, but that's why a lot of them have, have, have kind of, you know, some of them have lagged, some of them have come down in recent months. So I, I think that, that there is significant risk here. I think that there is, uh, I mean, I think we're seeing all of the telltale signs of a boom and bust cycle where similar to the railroads in 1873, you buy a lot of this stuff. There's a, there's a gold rush. Everyone's excited about it. We buy as many chips as we can, and then we learn, oh, hold on, actually it's going to take a, a long time to build the data centers. It's going to take a long time to get the power generators and the power transformers connected to the data centers and connect

• 1:01:21Speaker 01

  this stuff to the grid. So actually, maybe we overbought because I know this because I'm looking at my warehouse and we've got billions of dollars of chips right now that are just sitting around collecting dust. So I think all of that stuff is happening, but investors are pricing it in. The only place where I think that the bubble is not being acknowledged and is not being properly priced is in the private markets, where I think that their risk profile is totally different. I think that VCs in Silicon Valley are basically just like, we love the technology. This guy's an awesome founder. Who cares? One and a half trillion dollars, $2 trillion doesn't matter. But I think that when Anthropic

• 1:02:02Speaker 01

  and OpenAI go public, they're going to be entering into a different world where investors are going to be a lot more discerning. Uh, and I think that they're going to be in for a rude awakening because of that. And we might've discussed that last week. But to me, the bubble in terms of where prices or, or, or assets are not being correctly priced or risk is not being correctly priced, it's in the private markets, whereas the public markets, you look at the valuations and they seem to be reflecting a, a cautious optimism about the whole thing. They seem to recognize that, that yeah, CoreWeave might default. And that's why it's, credit default swaps are skyrocketing right now. So I think it's that the bubble is there, but it's priced.

• 1:02:45Speaker 00

  So when I was a sophomore at UCLA, I know you want more personal anecdotes.

• 1:02:50Speaker 01

  I do, I do.

• 1:02:51Speaker 00

  Every summer I would, by the middle of the summer, I would be, or by the middle of the school year, I'd be putting everything on credit cards because I'd run out of money. And my fraternity house bills would come and I wouldn't pay them and the quote unquote trustees of the fraternity were nice and would let me rack up debts. And I had 12 weeks over summer to make and save about $3,000. Otherwise I wasn't re-enrolling at UCLA. And I would live on top ramen and bananas and milk, which I read you can live on. And you can't, but as a treat, every Sunday night, I used to clip a coupon out of the Daily Bruin and go with some of my teammates from the crew team. And for $3.99, we could go

• 1:03:32Speaker 00

  with our student ideas down to the Sizzler and we could have all you can eat salad bar and all you can eat fried shrimp for $3.99.

• 1:03:41Speaker 01

  Wow.

• 1:03:42Speaker 00

  It would open at 4:00 PM on a Sunday evening or close for lunch. It would open at 4:00 PM. We'd be there waiting. We would gorge for an hour and then we would walk around and some guys who were crazy would run and then we'd go back at 8:00 PM and eat another 11 million calories. And I remember sitting there eating like seven pounds of bad fried shrimp and I was scared to stop eating because I'm like, all I have is bananas and top ramen for the next six days. And I feel like that's basically big tech and capex. I feel as if they're afraid to stop spending. They do see evidence that this shit is paying off and that the demand on a lot of scenarios feels infinite. They're

• 1:04:27Speaker 00

  worried about falling behind and missing, it's like when Janet Yellen, uh, in stimulus, COVID stimulus was just criticized, like $7 trillion flushing the economy, incredible inflation, 85% of recipients didn't even spend the money. You overdid it Janet or you know, Chair, Fed Chair, was she Fed Chair or was she the head of?

• 1:04:48Speaker 01

  Uh, Treasury.

• 1:04:49Speaker 00

  Oh, she was head of Treasury. You, you know, Secretary Yellen, you blew it. And she said, the risk of overspending was dwarfed by the risk of underspending. And I think that's how these guys are approaching it. The risk of missing AI and not making these huge expenditures and most, and also it's kind of a moat. There's only a small handful of companies that can make these kind of expenditures. So they think capital as a, as a point of differentiation, I'm Meta, I can spend 40 billion, uh, you know, whatever, or I forget what they were spending per quarter, but what other sector could spend three quarters of a trillion dollars on capex? And if, sure, if it goes away, if it doesn't

• 1:05:30Speaker 00

  work out, more, notice how they're trying to offload a lot of these expenditures to other investors in the private credit markets and create separate entities such that if these things default, it won't hit their equity. Quite frankly, that's really financial or prudent, uh, financial management. But the existential threat here is the one you outlined, and that is the level of capex commitments these companies have made. Connotes the following, that this market will grow to 3 trillion in revenues. And right now, all of big tech is 1.5 trillion in revenues. That AI is going to treble the spend on big tech with applications and business B2B services that it is currently now. That is sort of the overhang or the existential risk.

• 1:06:15Speaker 00

  But it, you know, the railroads, right? The technology survived, changed the world, a ton of bankruptcies along the way. And I think a lot of people are saying the same thing here. But I do think a lot of the, unfortunately, I think a lot of the traditional players are going to be the big winners here, and a lot of the newer players are going to be the ones that suffer.

• 1:06:36Speaker 01

  Agreed. I think that's all exactly right. It's like, it's a classic boom bust. It's a classic bubble. And it's not like these companies, there's not some, you know, grand conspiracy theory behind the thing. Like, you look at the railroad company boom as an example. Those companies went bankrupt not because they were grifting their customers. They went bankrupt because, essentially because they had mismatched durations, which we've talked about a lot. They laid down too much railroad for traffic that didn't never come. It just didn't come on time. And so, the companies that miscalculated their timelines and took on too much debt, they went out of business. They went bankrupt. And we're seeing the same thing here.

• 1:07:21Speaker 01

  It's like, I look at those chips in the warehouses, you know, in our conversation last week with Ed Zitron, and credit to him because he predicted that we would see exactly this story, that we would see warehouses filled up with chips that aren't being used. And to be, credit to him, people were calling him crazy, saying it was ridiculous. Where I disagree with him is this idea that it was this sort of grand conspiracy theory that was concocted by Jensen Huang to sell more chips than the system actually needed. But no, it's just, they thought that they were going to be able to get them online. They ran into this snag, which is that it's actually very, very difficult to get data centers online as quickly as they had hoped. And so now they have all of these chips that are depreciating. That is a bad thing.

• 1:08:03Speaker 01

  It's a problem that there is a snag in the supply chain here because it probably means that we're going to see more delays. It probably means that in their next GPU order, it's going to be significantly lower. It probably means that a lot of these data center construction companies are going to continue to struggle to actually start generating profits from those data centers. And they also have locked in these very, very high rates because they've been taking on debt. Companies like CoreWeave, like basically all of the NeoClouds. And yeah, it's going to be the same thing. It's going to be a handful of companies like them going out of business. And again, the markets are telling us that. Like, you look at the names, the NeoClouds, which are being taken to the woodshed right now.

• 1:08:46Speaker 01

  That's the markets just telling us exactly the story that we're laying out. So I guess it's kind of an interesting thing because it's all of the telltale signs of a bubble. But it's almost like the market is so aware of bubbles, like we've watched the Big Short so many times, we're so familiar with what happened in 99 and 2000, that we're actually displaying a level of caution that maybe we haven't seen in previous boom bust cycles. Because it seems like the market continually is pricing in the possibility that this does go wrong. So, until valuations go totally crazy, I'm not so worried about it.

• 1:09:26Speaker 01

  I think that this bubble is real, and I certainly think it's infecting prices in the private markets. But, you know, I would want to see these hyperscalers trading at ridiculous valuations, trading at like, you know, 50, 60, 70 times earnings. I would want to see something like that before I say, oh my gosh, you know, stock market's about to crash. I don't think it's going to happen because I think investors are generally pricing things for the stocks that matter, pricing them sensibly, would be my view. Not true of Anthropic and OpenAI.

• 1:10:01Speaker 00

  Yeah, so you're saying the markets are sort of behaving rationally? And, I mean, what would Josh Brown tell us to do? He would tell us to buy Nvidia, which is what, trading at 17 times earnings? What's it trading at?

• 1:10:13Speaker 01

  Yeah, I think 17 times forward, something around there. It's come down significantly. I've been, I've been thinking about it. I just, it's such a, it seems so cyclical. And as soon as it runs out, I don't know, I'm really, I'm stuck on Nvidia because it has, it does feel a little bit dislocated, but I don't see how we don't see a massive slowdown in the AI cycle. And I don't see how the sentiment wouldn't continue to hurt Nvidia. But, on the fundamentals, I don't know, I'm a little stuck on Nvidia.

• 1:10:46Speaker 00

  There you go.

• 1:10:46Speaker 01

  My final thing that I just want to bring up to you that I thought was really interesting, just looking at Meta's 10-Q filing. So, they said, quote, "Recent significant capital raises at other notable companies and others soon anticipated to take place to fund the same AI growth." For example, Alphabet, SpaceX, Anthropic and OpenAI, here's the most important part, "have resulted in an increasingly challenging environment for raising capital." That, to me, was probably the most important sentence in the filing because they're basically saying like, this AI boom, which has generally been funded with investors' money, not with

• 1:11:29Speaker 01

  profits, that might be about to run out. And I talk to my friends who run AI startups or who are investors in that ecosystem, a lot of them are saying the same thing, which is that the vibes seem to be shifting and capital isn't drying up, but it's certainly a lot more, a lot more hesitant. You could go out and raise a billion dollar round, easy, no problem, a month ago, but that's not true today. That's what I'm hearing, and it seemed to be reflected in that 10-Q. Are you hearing the same thing?

• 1:11:58Speaker 00

  It's the K-shaped economy. It's the, the companies backed by Sequoia and Andreessen Horowitz are, are eating wagyu and Nobu, and the smaller companies than everybody else are, you know, buying groceries on buy now, pay later. There's just so much capital available, I think, for the perceived winners. I read that, I read the same thing you read at Meta. I read it as justification for them trying to figure out new stock issuance that lets Zuckerberg maintain control, such that if the wealth tax passes, he can raise money without giving up his control of the company. I saw it as them trying to create a new class of stock that's non-voting, such that

• 1:12:43Speaker 00

  he can maintain control, and if he needs to raise, what I think is like, he needs to raise like $15 billion kind of overnight if Prop 40 or whatever it is goes through. So I didn't see that as a reflection on capital.

• 1:12:55Speaker 01

  I think it's both. I think it's both. I think they're saying like, we need to issue these shares because Mark needs to maintain control, because we need to sell $800 billion worth of shares, because we need to raise money for the capex. But, I mean, they're going to spend this amount of money and they're running out of cash flows, and they don't want to keep raising debt. But I think they're also, so, that's one part of it. And then I think they're also saying, by the way, we might struggle. I think it's both.

• 1:13:25Speaker 00

  I think Meta's on such a roll that I don't think, I don't think, everyone would pray for their problems in terms of their ability to raise capital. I don't, you know, they're able to off-balance sheet, there are a lot of their capital commitments, they're able to offload that risk to other private credit sources. Their stock, I think, is trading at a near all-time high. Their business is just firing on all 12,000 cylinders. If you want something that marks the age, it's Meta up 26% with fewer employees. I mean, that's every politician and citizen's nightmare and every shareholder's dream, that a company this big can grow 26% a year with fewer employees.

• 1:14:10Speaker 00

  That's just, okay, where does that take us? But I didn't, I didn't read it that way.

• 1:14:16Speaker 01

  Okay. Let's take a look at the week ahead. We'll see the personal consumption expenditures index for September and consumer confidence for October. We'll also get the Federal Reserve's latest interest rate decision on Kalshi. The odds they'll hold steady are at 93%. And earnings will keep rolling in from Visa, Coca-Cola, Boeing, Google, Microsoft, Service Now, Amazon, Eli Lilly, Intel and SanDisk. Scott, any predictions?

• 1:14:40Speaker 00

  Well, a small one and a bigger one. Eli Lilly has become, I think, kind of the AI trade of your waistline. I think it's going to show, I think it's even going to even blow away its incredibly ambitious estimates. I think this is the most interesting company, at least to come out of Indiana. But I think that GLP-1s, and again, I've said that I think GLP-1 is going to be more transformative than AI, but I think we're going to see that in their upcoming earnings. My bigger prediction is, my friend Whitney Tilson sent me, WhatsApp me with a friend of his views on a company. And if I were to ask you, what company in three years do you think will look back and think, that was the big winner of this AI boom?

• 1:15:25Speaker 00

  Who would you say it would be?

• 1:15:27Speaker 01

  Honestly, Meta.

• 1:15:29Speaker 00

  Oh my god.

• 1:15:29Speaker 01

  Is my view.

• 1:15:31Speaker 00

  Wow. The student becomes the master.

• 1:15:35Speaker 01

  Is that, is that your answer?

• 1:15:36Speaker 00

  Yeah, I feel like I'm on, I'm on.

• 1:15:38Speaker 01

  Well, no, it's good, we agree.

• 1:15:39Speaker 00

  I think I'm on the, what's it called, the Starship or the Death Star? And I'm Obi-Wan Kenobi, aging with my shitty little limp dick laser or, or lightsaber. And you're about to, you're about to send me to, back to, I think I turned back into Anakin Skywalker, do I get some sort of redemption? Anyways.

• 1:15:57Speaker 01

  But let's hear it, yeah.

• 1:15:58Speaker 00

  Meta, AI strategy is finally bearing fruit, and it's a business model only Meta can execute on. And I think about this.

• 1:16:07Speaker 00

  A lot of technologists are saying Meta is arguably a parody with Anthropic and OpenAI in terms of the quality of their LLM. And here's the moat, the mother of the Amazon-like moat. Unmatched distribution. They have direct relationships already with 500 million businesses, which the other AI foundation models have relationships with thousands, and a small number of them make up a huge percentage of their revenues. I don't think any one business or advertiser is more than like a third of a percent of Meta's revenues. So, okay, 500 million consumers? No, 500 million businesses. How many consumers? 3 billion every day. So when we talk about the future of AI, everyone said it's going to be, and Marc Benioff's

• 1:16:50Speaker 00

  been talking about this for years, the agentic layer where my travel agent is going to go talk to the agent, you know, the compatible AI agents at Delta or at the Waldorf or wherever, and negotiate with each other? Who can set that marketplace up faster than a company that already has 500 million relationships on the business side and 3 billion on the consumer side? So, and then its app, Muse, is already number one in the App Store. Huge moat and revenue unlock potential. And also, they're talking about Muse is moving to a confidential voicemail where even Meta can't see content trying to kind of address privacy concerns.

• 1:17:34Speaker 00

  If Zuckerberg just, and I agree, but by the way, but let's be fair, consumers have shown they talk a big game about privacy and really don't care.

• 1:17:43Speaker 01

  I know, it's not, it's not a bragging point for Muse for me.

• 1:17:46Speaker 00

  I get it. But if you take, I mean, I hate to admit this because I think he's a sociopath. I think Zuckerberg is arguably the best operator in business right now. And if you take these 500 million businesses, these 3 billion daily active users, and you layer on top of it a parity model and cash flow to support the ridiculous capex that's required here, these advantages compound. And so I see messaging, I see commerce. To me, and also just, this is anecdotal evidence, I cannot get over how addictive and good Instagram has become. And it's AI.

• 1:18:31Speaker 00

  I literally feel as if they're reading my mind in terms of, Scott, we have an idea to keep you here for another 3, 5, 30, 60, 90 minutes. And they keep mixing videos with Great Danes and then Vivek Ramaswani's new Kalshi poll. It's as if they're literally reading, they know what I want before I know.

• 1:18:53Speaker 01

  Yeah. And we see it in the numbers. I mean, the ads are double-digit growth in terms of impressions and also double-digit growth in price per ad.

• 1:19:04Speaker 00

  Targeting, they get higher CPMs because they can use that.

• 1:19:08Speaker 01

  But here's the crazy thing. So I 100% agree with you. And by the way, my victory lap is I bought it this year. I loaded up at 564, we're at 640. So I've locked in a kind of a big win on Meta. But still, $1.6 trillion market cap. Anthropic is supposedly $2 trillion. Like if there's any example of the dislocation between the private and the public markets here, it's like, that's ridiculous. Not only is Meta competing neck and neck with Anthropic, they also have one of the most profitable, best businesses in the world right now. The only thing downside is that they're spending a shit ton of money on the capex, and it does

• 1:19:53Speaker 01

  look a little bit, a little bit crazy. But in terms of the health of their underlying businesses and like who's really getting a return on AI, I mean, you've got to say, if we believe that the strength of the recommendation algorithm is a function of AI and machine learning, Meta, it's right there. It's right there in the earnings.

• 1:20:12Speaker 00

  So, you know, how do you play, people are constantly, how do you play the AI trade? Is it Nvidia? Yeah, that's, that's a good, that's a decent one, decent PE, but it's the E that scares everybody. But I think on a risk-adjusted basis, the biggest upside in this AI world right now that's delivering it, both from a consumer standpoint, has the biggest moats, has the capital to engage in this arms race, and is showing they know how to leverage AI for their own internal purposes. I hate to admit it, it's Mark Zuckerberg and Meta right now.

• 1:20:45Speaker 01

  I think I agree. I think I might wait for a better entry point. I did, yeah. I, correct. I'm just looking at the price now, I guess.

• 1:20:54Speaker 00

  You're starting to sound more and more like a Signal Award winner.

• 1:20:56Speaker 01

  My prediction, I, this is a hot take. I don't know if it's actually going to happen, but it's fun. I think that SpaceX is going to join the S and P, not because it actually qualifies for joining the S and P, but because it's going to take the backdoor option of acquiring Tesla, and that's going to be its shortcut into all of our portfolios. I hope it doesn't happen, but I think it will. This episode was produced by Claire Miller and Allison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Shalon, Kristen O'Donoghue, and Mia Silverio. Jake McPherson is our social producer. Drew Burrows is our technical director, and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media.

• 1:21:41Speaker 01

  If you liked what you heard, give us a follow and tune in tomorrow for a fresh take on the markets.

• 1:23:24Speaker 04

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