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AI and the related bottlenecks and infrastructure are still driving the market right now.
Today I want to walk through two possible outcomes for AI brought up by Professor Aswath Damodaran.
Let’s see if either one can justify today’s level of investment, or stock prices.
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The AI Buildout
It’s no secret that companies are spending massive amounts of money building AI.
2027 CapEx is projected to be more than $1 Trillion.
Between now and 2031, the total spend is projected to be more than $7.5 Trillion.
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If you had $7.5 Trillion, you could buy all of Microsoft and Amazon, and still have $1 Trillion left over.
To justify spending that kind of money, companies will need to generate a lot of revenue.
In SpaceX’s IPO filings, they said their Total Addressable Market is $28.5 Trillion.
$26.5 Trillion of that is AI-related
$22.7 Trillion is AI Enterprise Applications
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This means that SpaceX expects 80% of their market to be companies paying for AI applications.
Option 1: AI Is A Huge Success
For businesses to justify the kind of spending SpaceX projects, AI has to replace a lot of the professional class.
Companies have to be able to replace software engineers, consultants, and marketing departments at a lower cost.
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That expectation - that companies will be able to cut their labor budgets, and increase profit margins is what’s driving the current valuations of everything related to AI right now.
It seems like a pretty obvious investment.
Big tech is pouring trillions into data centers and hardware
AI models are improving rapidly and will eventually replace human workers
Companies will see record profit margins, the AI companies will get a cut of that
Investors in both the models and the adopters get filthy rich
But investing is almost never that simple.
Especially in something as uncertain as how AI will play out.
Now’s a great place for this Charlie Munger quote: