The AI capital spending boom
In every technology boom, the people selling the equipment make money first and reliably. Whether the buyers do is a separate question.
Tell the difference between revenue from a boom and a return on it.
How the AI capital spending boom works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
One investment is the fund
Most go to zero and that is not a failure of selection, it is the shape of the asset class. It is why a venture investor has no use for a company that will merely do quite well.
- 1
Follow the cash, not the narrative
One company's capital expenditure is another company's revenue. The chip designers, memory makers, networking and power suppliers are booking enormous, real, cash revenue right now. That part is not in doubt.
- 2
The buyers are making a bet, not a purchase
The hyperscalers are converting cash into depreciating assets on the expectation of future returns. That is exactly what railways, fibre and the dotcom build-out did. Some of those bets returned spectacularly and some destroyed a generation of capital, and the equipment sellers were paid either way.
Depreciation is the tell. Watch what happens to their return on invested capital as those assets start depreciating in earnest.
- 3
Ask the ROIC question
A company earning 5% on capital that costs it 8% destroys value by growing. If the AI spending does not eventually produce returns above the cost of the capital funding it, the boom will have been a very large transfer from the buyers to the sellers.
- 4
Capacity gluts follow capacity booms
Everyone is building at once, and the capacity all arrives at once. That is the same mechanism that drives the memory cycle, and it has never once failed to produce a glut.
You can name who is booking the revenue and who is taking the risk.
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In every technology boom, the people selling the equipment make money first and reliably. Whether the buyers do is a separate question.
The near-monopolies and the commodities, side by side, because they look identical from outside and they are not.