The AI Trade - Long Term Opinion

TLDR: The ai trade is out of wack, looking at current winners and disregarding long-term winners.

This is my personal outlook, please point out anywhere my logic or assumptions seem flawed.

The AI industry has 5 layers. From bottom to top they go,

• Chips (silicon, semis): NVDA, TSMC, AMD, MU, etc. To a lesser extent, AMZN, GOOG, and in the future MSFT
• Infrastructure (cooling, data centers): VRT, ETN, CEG, MAFT, GOOG, META
• Computer/Cloud (cloud): MSFT, GOOG, AMZN
• Models (the models being run): GOOG, Open AI, Anthropic, META, MSFT (starting to develop their own model)
• Applications/end users (workflows, apps, software, anything that consumers see/use.): MSFT, CRM, PLTR, NOW, SAP, GOOG, Open AI, Anthropic

When people refer to an “AI Bubble” they are referring exclusively to the first step and sometimes second in the chips and hardware that have seen a major run up, but these are the shortest term benefactors of the ai trade. With the current massive buildout, these plays are seeing the most gains both stock wise and business wise. While they were/are still a great investment in many cases, this next year or two will likely be their “top” in terms of pure business performance. The question is not “if” The insane buildout will stop, it’s “when”. And while the floor for these companies is permanently raised because there will still be upgrades and maintenance spending, the current trajectory is not permanent or long term.

Long-term, the companies in each of the next three steps are poised for the biggest benefit, specifically those with exposure to more than one of those steps - GOOG, MSFT, META. For extra “step” a company is active in, either revenue is collected in each step, or costs are reduced. I’ll use MSFT as an example.

With their Maia chips, they are able to spend less on their buildout, as they are not paying a premium for chip design. Further down the line (similar to GOOG and AMZN) it is likely they also begin selling their chips and collecting revenue in this first step.

Then there’s cloud/infrastructure that go hand in hand. Every prompt, every action taken further down the line needs this compute. MSFT collects revenue on this, and when their own models begin rolling out, their cloud cost will be lower, as they aren’t paying for it.

Then is the model layer. This is self explanatory - just the models that gets utilized in prompts, actions, workflows, etc. Every prompt has costs flowing down to the cloud/infrastructure level. For MSFT, they are currently “renting” models from Open AI, Anthropic, etc. in Copilot, although they are still collecting subscription revenue on Copilot, their margins are thinner than if they had their own model - which they are currently working on creating.

Finally is the application/end user uses. For some, this is simply the LLM subscriptions. For others it is the software that utilizes the LLMs for tasks or whatever. Every use of these flows through the Models/LLMs, to the cloud compute, and to infrastructure. With MSFT, this is Copilot and workflows that can be made from it. Eventually, flowing through their own model and cloud compute.

Long term, the companies that will benefit most from AI are those in steps 3-5. With every additional step a company is exposed to, their benefit is multiplied because they are either collecting revenue at each step, reducing their own costs at each step, or a combination of both.

In conclusion, I believe the biggest long term winners (out of known names, I’m sure there will be new companies that pop up and kill it) will be those exposed to cloud, models, and end uses. These are MSFT, GOOG, and (to a lesser extend because their cloud is private) META.