Neal S.

This is an excellent post by my former boss @RamaswmySridhar. I encourage everyone to read it carefully and fully appreciate the various industries and business models he outlines, all of which have some type of risk of ruin. However I am going to take the other side of this debate and make the ominous "this time is different" argument. Before I start I would to qualify my position, the most likely scenario is a serious market gyration due to an air pocket where supply of AI h/w overshoots demand. The sooner we get there the better but I still think this is very different than 2000 tech bubble and a downturn will be short lived if at all. The two core differences IMHO are 1) Circular financing offered by massively profitable (over-earning) vendors could be a feature not a bug 2) Digital goods in general and more so Tokens (intelligence) have ~infinite elasticity of demand The 2nd one is quite obvious not just because of Jevon's paradox but rather because of the rapidly growing ecosystem of businesses (new and old) that consume tokens to enhance existing services or create new ones. This is especially true because it's still the case that one of the easiest ways to get better outcome is to brute force N attempts in parallel and pick a winner. However (1) is the more interesting one, obviously controversial and admittedly I'm on Hopium as I type this. The scariest part of this CapEx cycle is the fact that GPUs go through rapid cycles of improvement, hence they are perishable goods, so unlike the Dark fiber that was lit up 15 years later, and old GPU is worthless. Given we have plenty of A100s in production it's obviously more complicated but the risk is very legitmate. Before focusing on GPUs/Memory, let's remember that the CapEx bill includes many other components, most of which have far longer lifetime, so one can argue that only 50% of the BOM is perishable. Back to vendor financing, if you look at it from the Chips sector perspective, they obviously want to plan for success and like many others assume that oversupply situation is merely temporary so given they have extremely high gross margin (SK Hynex just reported 80%), they have many ways of handling the air pockets scenarios. The easiest one would be to lower pricing and not hold their customers into the LTA they signed, because most of them are too big to fail and the vendors have no interest seeing the industry collpasing. While "extend and pretend" is often mocked on X, it's a completely logical approach for lenders in commercial real estate. Back to Chips, given the perishable nature and high gross margins, the vendors can keep prices high and offer "trade-ins" for the older equipment.