GoKawiilThe catalysts for a crash are already laid out, and it can happen sooner than most expect. AI is here to stay. If used right, chances are it will make us all more productive. That, on the other hand, does not mean it will be a good investment.
Big tech doesn’t need to win, just outspend
Magnificent 7 companies are increasing capex to their biggest ever to differentiate their tech from each other and the big AI labs, but the key realization is that they don’t have to spend it to win. It’s a defensive move for them, if they commit $50B, OpenAI and Anthropic need to go raise $100B each to stay competitive, which makes them reliant on investors’ money. As the numbers get bigger, the amount of funds that can write checks of the size required to fill such amounts gets smaller. And many of them are now getting bombed in the Gulf.
This is the reason there’s a push for IPOs, it’s because it’s the only option left to keep the funding coming.
Taking this into account, Google is extremely well positioned to weather the storm. When they announce capex expenditure, they don’t spend it overnight. They can simply deploy month by month until their competitors struggle to raise and get forced to capitulate. At that point they can just ramp down the spending and declare victory in a cornered market. They don’t need capex, they just need to make it very clear for everyone that nobody can outspend them. It is hard to picture as numbers get so big, but Alphabet (Google’s parent) is ten times more valuable than the biggest military company .
This also has a great implication for the Mag 7, especially Google: their capex will be a lot smaller in practice than projected, and as investors hate to see high capex in tech, the market will probably reward that if it materializes.
Apple didn’t even have to pretend, their strategy of waiting on the sidelines, while selling Mac Minis, for someone to come up with a good-enough model and just buy that when it’s done seems to be working. They may not even do that, they are now hinting at charging models for being available on Siri. Amazon is hedged with an Anthropic investment, and Meta is spending like there’s no tomorrow.
The catalyzer
We’re hitting the worst-case scenarios for the big AI labs: energy, their biggest expense, is at multi-year highs, capital from the Gulf is not available for obvious reasons, there are serious concerns about a rate hike, and RAM prices are crashing because new models won’t need as much, but labs already bought them at sky-high prices. And that last innovation came from their biggest competitor, Google.
Anthropic is already in a push to reduce costs and increase revenue. If investor money dries up, they will be forced to cut their losses and pass the true costs to their users. The question is now if customers will be willing to pay up. Independent reports state that Claude metered models are priced 5x more expensive than their subscribers pay, and nobody is sure if even their metered pricing is profitable. In investing, stories are way more exciting than reality: a company losing money but growing like crazy is an easier sell than a huge company losing money or with tight margins. Raising prices will for sure decrease demand and that risks killing the growth story. And even if revenue keeps growing, it doesn’t matter if there are no margins — growing revenue without profits just means burning cash faster, especially when competing against companies that can offer the same product as a loss leader bundled into their cloud platforms.
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