r/valueinvesting
The 3 AI Pyramid Schemes Explained
Argues AI hyperscalers run a pyramid scheme via inflated CAPEX, circular financing, and overstated GAAP earnings.
- Hyperscalers may be using aggressive depreciation schedules to artificially inflate short-term GAAP net income.
- Circular financing among AI ecosystem participants creates unsustainable demand that masks true organic growth.
- Current valuations are detached from fundamentals and rely on perpetual exponential expansion of CAPEX.
As with all my videos, even if you disagree, I hope you learn something new.
I lay out the 3 pyramid schemes driving the hyperscalers and AI trade right now:
Pyramid 1: The CAPEX Ladder and why depreciation is the core of faking short term earnings
Pyramid 2: The Circular Financing Reinforces Pyramid 1
Pyramid 3: Valuation Increases Are a Byproduct of Pyramid 2
I explain in detail how these three pyramids must expand every year, by huge amounts, or else the whole trade falls apart, and how this is ultimately very similar to how other bubbles have inflated in the past.
I believe that most of the hyperscaler's GAAP net income is overstated, likely by huge amounts in recent years.
If nothing else, like I said, I hope you can learn something. It's a long video, but there is a lot of info in there.
I think you definitely understate the usefulness of the tech - LLM's are getting very good at coding. But I completely agree on everything else and you explained everything very clearly. Good video.
I also code, but not really full time, more for financial automations/calculations for my value investing. I will say it's a weird spot for me to be in because I definitely see the usefulness of the tech, I'm in ChatGPT Pro every single day constantly, also Claude, and GenSpark AI. I've tried local LLMs recently as well, and everything is super useful.
I'm studying right now for my PE exam, and last time I studied was in 2012 (long story but I didn't need my PE until now). Anyways, it's like having a personal tutor - it explains everything. I can ask it to solve problems, etc... Yesterday I was having trouble understanding something so I asked it to generate a visual simulator so I could visualize all the vectors moving in space. It generated it and I ran the script. There is 0 chance in hell I could duplicate something like that without ChatGPT/LLMs, even if I hired a team of private tutors. It probably just delivered me like $5000 of value in a few minutes.
So on the one hand, I absolutely see the usefulness. But on the other hand, how many people are really like me out there? And I'm not willing to pay $5000 or anything close to that for this custom program.
I've used it for coding as well, and personally, I get insane value out of it. I pretty much don't write code anymore myself, although most of my code is pretty linear (very little dependencies), so it's basically the perfect application for LLMs.
I get that it changed programming and all sorts of other fields, but is there enough ROI out there to justify $1T+ of spending? Probably not. Like I said, the entire software industry wages are only something like $230B in the US.
The other inconvenient fact is that for my PE Exam problem, I also ran the problems through local open LLMs, and it did just fine. It also got the answers consistently right and was insanely useful. This results in $0 of revenue for anyone other than my electric company. Yeah, ChatGPT was better, but tasks aren't getting harder every year, and LLMs are getting better, and local hardware (your home PC) is getting faster, so if anything, LLMs will have long term challenges around revenues/profitability as they have to compete more and more with edge computing.
No idea how legit your analysis is but I enjoyed your video and feel like I’ve learned something new. So thanks for that.
Well, we're in a market mania, so I'm not expecting anyone on here to love what I have to say.
My point with this post was more for posterity so I can point to it later and say 'I warned you guys and got downvoted to shit', which so far is exactly what is happening lol