The Hater's Guide To The AI Bubble, Pt. 1

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2:31call zone media hello and welcome to better offline i'm your host ed zitron

2:47check out the episode notes got wonderful merchandise and completely separate to the podcast got wonderful newsletter where's your red dot at with the premium section i would love you to subscribe to but i also got some good news you've got another three-part episode the second of the year and this week we're going to be talking about how the cracks in the generative ai market are becoming harder to ignore and how recent events are making a collapse seem all the more inevitable what that means for the wider economy really the markets and you and i want to make that case because as a journalist i believe i have the duty to give you the information you need to make sense of a world increasingly feeling incomprehensible and of course detached from reality and where everything is consequential to everyone where it's impossible for ordinary people to shroud themselves from the consequences of decisions made by the executive and shareholder class good journalism is making sure that history is actively captured and appropriately described and assessed and it's accurate to describe things as they currently are as alarming and boy howdy am I alarmed.

3:48Now, alarm is not a state of weakness or belligerence or myopia. My concern does not dull my vision, even though it's convenient to frame me as somehow alarmist, like I have some hidden agenda or bias toward doom. I profoundly dislike the financial waste, the environmental destruction, and fundamentally, I dislike the attempt to gaslight people into swearing fealty to a sickly and frail pseudo-industry where everybody but Nvidia and consultancies lose money. and i also dislike the fact that i and others like me are held to a remarkably different standard to those that paint themselves as optimists which typically means people that agree with what the market wishes were true critics are continually badgered prodded poked mocked and jeered at for not automatically aligning with the idea that generative ai will be this massive industry constantly having to prove themselves as if somehow there's something malevolent or craven about criticism the critics do this for clicks or to be contrarian i don't do anything for clicks or downloads or prestige.

4:43I don't have any stocks or short positions. My agenda is simple. I like talking about this crap and it comes to me naturally. I have a podcast and it is on some level my job to try and understand what the tech industry is doing day to day. And I get it. I get it's easy to try and dismiss what I say as going against the grain because AI is big and AI is something we should all be impressed by. And the AI is the thing that's going to start everything and all this fucking money is tied up in it but look this isn't a fad for me this isn't something i'm doing because i feel like it because i'm jumping to the next trend no i've been railing against bullshit bubble since 2021 the anti-remote work push and the people behind it the clubhouse and audio social networks bubble the nft bubble the made up quiet quitting panic and even even and this one i got no credit for i called that something was up with ftx several months before of it imploded did i do much more than that no i found one thing nevertheless this isn't contrarianism not at all it's the kind of skepticism of power and capital that's necessary to meet these moments and it's if it's necessary to dismiss my work because it makes you feel icky inside get a therapist or see a priest nevertheless i'm alarmed and while i have said some of these things separately based on recent developments i think it's necessary to say why in short i believe the ai bubble is deeply unstable built on vibes and blind faith and when I say the AI bubble, I mean the entirety of the AI trade.

6:08And it's alarmingly simple too. He says before doing three episodes on it, but this isn't going to be some saccharine whiny or simply worrisome podcast. I think at this point, it's become a little ridiculous to not see we're in a bubble. We are in a goddamn bubble, by the way. It's so obvious we're in a bubble. It's been so obvious we're in a bubble. It's been obvious for months, if not years, a bubble that seems so strong, but it's actually very weak with a central point of failure. I may not be a contrarian, but I am a hater. I hate the waste, the loss, the destruction, the theft, the damage to our planet, and the sheer excitement that some executives and yes, some writers have that workers may be replaced by AI.

6:43And the bold-faced fucking lie that it's actually happening and what generative AI is doing is somehow proof that it will. And so I present to you, The Haters Guide to the AI Bubble, a comprehensive rundown of the arguments I have against the current AI boom's existence. send this podcast to your friends your loved ones or i don't know blare it in their ears like you're torturing them but no this isn't going to be a traditional guy but something you can listen to and say oh that's why the ai bubble is so bad and at this point i know i'm tired of being gaslit by guys in gingham shirts who desperately want to curry favor with other guys in gingham shirts but who also have phds i'm tired of hearing people talk about how we're in the era of agents that don't fucking work and will never fucking work i'm tired of hearing about powerful ai that's actually crap and i'm tired of being told the future is here while having the world's least useful most expensive cloud software shoved down my throat and up my asshole look the generative ai boom is a mirage it hasn't got the revenue or the returns of the product efficacy for it to matter everything you're seeing is ridiculous and wasteful when it all goes tits up i want you to remember that i said this i tried to say something i've been trying to say something for a while but let's start with something real obvious let's start by talking about the so-called magnificent 7's weak point and it's not the one you'd think because it's nvidia as i write the script for this podcast nvidia is sitting around 170 bucks a share a dramatic reversal of faith after the pummeling it took from the deep seek situation in january which sent it tumbling to a brief late april trip below 100 before things turned around the mag 7 stocks nvidia microsoft alphabet which is google apple meta tesla and amazon make up around 35 of the value of the US stock market.

8:24And of that, NVIDIA's market value takes up about 19 % of the Magnificent 7. They're about 8-9 % of the entire US stock market. It's not brilliant. This dominance is also why ordinary people ought to be deeply concerned about the AI bubble. The Magnificent 7 is almost certainly a big part of their retirement plans, even if they're not directly invested. Back in May, the wonderful Laura Branton from Yahoo Finance reported that Microsoft, Amazon, Meta, Alphabet and Tesla alone make up 42.4 % of NVIDIA's revenue. The breakdown doesn't make things better. Meta spends 25 % and Microsoft an alarming 47 % of their capital expenditures on NVIDIA chips.

9:02And as Bratton notes, Microsoft also spends money renting servers from CoreWeave, which analyst Gild Luria of DA Davidson estimates accounted for$8 billion, more than 6 % of NVIDIA's revenue in 2024. Luria also estimates that NeoCloud companies like CoreWeave and Crusoe that exist only to provide AI compute services account for as much as 10 % of NVIDIA's revenue or at least did so in 2024. NVIDIA's climbing stock value comes from one thing, its continued revenue growth. In the past four quarters, NVIDIA has seen year over year growth of 101%, 94%, 78 % and 69%. and in the last quarter a little statistic was carefully brushed under the rug nvidia missed though narrowly on data center revenue and data center revenue is by the way where the gpus go and all the associated hardware and so and kind of server architecture switches and the like and yeah this is exactly what it sounds like gpus that are used in servers rather than gaming consoles and pcs i get a lot of emails saying oh will it be easier for me to buy consumer graphics cards i don't fucking know mate i'm just here to talk about enterprise bullshit okay not really enterprise but enterprise scale gpus we're getting off track analysts estimated it would make it would make 39.4 billion dollars from the data center category and nvidia only only i know pathetic amount brought in 39.1 billion dollars then again this could be attributed to their problems in china especially as the h20 ban they were banned from selling a specific chip in china has only just been lifted in any case this was a miss and uh not sure why no one wanted to talk about it but there's another problem there's so many little problems here like nvidia's quarter over quarter growth has also become aggressively normal it went from 69 to 59 to 12 to 12 again he quarter of quarter which again isn't bad it's pretty great in fact but when 88 of your revenue is based on one particular line in your earnings it's a pretty big concern at least for me look i'm no stock analyst do not take stock advice from me i don't know about stocks i don't know what go up and down but i'll tell you i'll tell you something's not right here so but i'm going to keep this simple nvidia relies on not only selling lots of gpus each quarter but it must always sell more of them the following quarter more than 42 of revenue nvidia's revenue comes from microsoft amazon meta alphabet and tesla continuing to buy more gpus remember it's not about buying the same amount number must go up nvidia's continued value and continued growth is heavily reliant on hyperscaler purchases and continued interest in generative ai but really just the buying part the gpus are what matter and the u.s stock markets continued health relies on some level of five or six companies and it's unclear how many gpus apple buyers spending billions of dollars on gpus from nvidia and more every quarter in fact i found an an analysis from portfolio manager danke wang from january 2025 that found that the magnificent seven stocks accounted for 47.87 of the russell 1000 indexes returns in 2024 and that's an index fund of the thousand highest ranked stocks on the footsie russell's index which in simpler terms means 35 % of the US stock market is held up by five or six companies buying GPUs.

12:21If NVIDIA's growth story stumbles, it will reverberate through the rest of the Mag 7 II, making them rely on their own AI trade stories. And wouldn't you know it? Wouldn't you know it? When you look at the stories, there is no AI trade because generative AI is not making anybody any goddamn money. But I have to make money, which is why you need to listen to the following advertisement. It's the only one of these bloody things you're going to get. Here's an ad.

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14:39844-844-IHEART to get started. That's 844-844-IHEART. Hi there, this is Josh Clark from the Stuff You Should Know podcast. If you've been thinking, man alive, I could go for some good true crime podcast episodes, then have we got good news for you. Stuff You Should Know just released a playlist of 12 of our best true crime episodes of all time. There's a shootout in broad daylight, people using axes in really terrible ways, disappearances, legendary heists, the whole nine yards. So check out the Stuff You Should Know true crime playlist. on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

15:17And we're back. And I am so tired of people telling me that companies are making tons of money on AI. They are not. Anyone saying this to you is lying or ignorant or both. The Magnificent Seven spent an insane$560 billion between 2024 and 2025 on CapEx, with the overwhelming majority going towards generative AI, and their effort for this wonderful effort for the more than half a trillion dollars these companies have made about 35 billion dollars in revenue and no profit and i must say and this is a technical term this is egregiously fucking stupid but let's break it down starting with starting out in redmond with our friends at microsoft and they plan to spend 80 billion dollars on capex in 2025 now as of january 2025 microsoft's annualized revenue meaning best month times 12 from artificial intelligence was 13 billion dollars a number that it's chosen not to update since likely because said number is either flat or not growing though it could in its upcoming i think at the end of this week or next one it's come got earnings coming up maybe there'd be good news yet the problem with this revenue is that 10 billion dollars of that revenue according to the information comes from open ai's spend on microsoft's azure cloud and microsoft offers preferential pricing i'm quoting the information here at a heavily discounted rental rate that essentially only covers microsoft's costs for operating the servers that's not good right like it's not good it's not good that 76.9 percent of microsoft's ai revenue comes from open ai and that revenue is made at cost or just above it which makes microsoft's real ai revenue about three billion dollars or about 3.75 percent of this year's capital expenditures or 16.25 percent if you count open ai's revenue which costs microsoft likely more money than it earns the information also reports that microsoft made 4.7 billion dollars in ai revenue in 2024 of which open ai accounted for 2 billion dollars meaning that for the 135.7 billion dollars that microsoft has spent in two years in ai infrastructure it's made 17.7 billion dollars of which OpenAI was$12.7 billion.

17:28It's kind of crap, isn't it? It's not very good at all. And things do not improve when we get to Amazon. An analyst estimates that Amazon, which plans to spend$105 billion in capital expenditures this year, will make$5 billion in AI in 2025, rising, and I quote, as much as 80%, suggesting that Amazon might have made a measly$2.77 billion in 2024 on AI in a year when it spent$83 billion in capital expenditures. and last year amazon ceo andy jassy said that and i quote ai represents for sure the biggest opportunity since cloud and probably the biggest technology shift and opportunity in business since the internet i personally think he is full of shit and it's a similar story over with google which plans to spend 75 billion dollars in capex 2025 bank of america analyst justin post estimated a few weeks ago that google's ai revenue would be in the region of 7.7 billion dollars though his math, if I'm honest, is a little generous because it includes subscribers to packages that include a lot of non-AI stuff too.

18:27Google's one subscription includes increased cloud storage across Google Drive, Gmail, and Google Photos, and added a$20 a month premium plan in February 2024 that included access to Google's various AI models. Google has claimed that the premium AI tier accounts for millions of the 150 million subscribers to Google One, though how many millions is impossible to estimate that one would stop me trying though assuming the 3.1 billion dollars in 2025 revenue would work out to 258 million dollars a month that would mean there were 12.9 million google one subscribers also paying for the premium ai tier this isn't out of the realm of possibility after all open ai has like 15.5 million paying subscribers but post is making a kind of a generous assumption here nevertheless we'll accept the numbers as they are because they fucking stink google's 1.1 billion dollar in workspace revenue came from a forced price hike on those who use google services to run their businesses my ass included meaning that it's not likely a number that they can significantly increase in the future because it was just raising the rent on everyone and that's 7.7 billion dollars of revenue not profit on 75 billion dollars of capital expenditures very nasty but let's move on to one of my faves meta which plans to spend $172 billion in 2025.

19:45Someone's going to get mad at me for saying this, but I believe that Meta is simply burning cash on generative AI. There is no product that Meta sells that monetizes large language models that I can tell at least, but every Meta product now has them kind of shoved in there. Your Instagram DMs oinking at you to generate artwork based on your conversation. Nevertheless, they do make some money allegedly, and we do have some sort of knowledge of what meta is saying they make due to a copyright infringement case cadre versus meta unsealed judgment briefs revealed in april that meta is claiming that gen ai driven revenue will be more than two billion dollars in this year with estimates as high as three billion dollars the same document also claims that meta expects to make 460 billion to 1.4 trillion dollars in total revenue through 2035 and this is from ai by the way and this is the kind of thing that should have you like wrenched out you should your key card should stop working when the words leave your mouth because meta makes 99 of its revenue from advertising and the unsealed documents state that it generates from its llama models and will continue earning revenue from each iteration and share a percentage of the revenue it generates from users of the llama models hosted by those companies with the companies in question redacted mr max zeff of tech crunch adds that meta lists host partners like amazon web services nvidia databricks grok dell microsoft is your google cloud and snowflake so it's possible that meta makes money licensing to those companies sadly the exhibits further discussing these numbers are filed on the seal and also their large language model is open source what service is meta providing are these companies so goddamn lazy that they need meta to come in and set up the fruit and jesus christ jesus christ when i read these numbers i just when i read about these people it drives me a little insane either way we are now at 332 billion dollars of capital expenditures in 2025 for 28.7 billion dollars of revenue of which 10 billion dollars of it is open ais at cost or just above cost revenue not great then there's tesla which doesn't appear to make money from generative ai and plans to spend 11 billion dollars on capix in 2025 despite its media prominence in the magnificent seven at least, Tesla is one of the least exposed companies of the Mag 7 to the AI trade, as Elon Musk has turned it into a meme stock company where what they do doesn't really matter.

22:05That doesn't mean, of course, that Musk isn't touching AI. The XAI, the company that develops racist large language model Grok and owns what remains of Twitter, apparently burns a billion dollars a month, and the information reports that it makes a whopping$100 million of annualized revenue, so about$8.33 million a month. Now, there's a shareholder vote for Tesla to potentially invest the next AI, which will probably happen, allowing Musk to continue to pull leverage from his Tesla stock until the company's decaying sales and brand eventually swallow him whole. But we're not talking about Elon Musk today.

22:36We are not. We have to talk about Apple now. And honestly, they're the least interesting part of this story. Their capital expenditures in 2025 are expected to also be around$11 billion, and they arguably have the weirdest AI story in The Magnificent Seven. apple intelligence radicalized millions of people against ai mostly because it fucking sucks apple clearly got into ai reluctantly and now faces stories about how they feel left behind in the ai race which mostly means that apple aggressively introduced people to the actual features of generative ai by force and it turns out that people don't really want to summarize documents or write emails or make custom emoji and anyone who thinks they would is a fucking alien in any case apple hasn't bet the farm on ai in so much as it hasn't spent 200 billion dollars and infrastructure for a product with a limited market that only loses money.

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25:09Jan Marselech was a model of German corporate success. It seemed so damn simple for him. Also, it turned out, a fraudster. Where does the money come from? That was something that I always was questioning myself. But what if I told you that was the least interesting thing about him? His secret office was less than 500 meters down the road. I often ask myself now, did I know the true Jan at all? Certain things in my life since then have gone terribly wrong. I don't know if they followed me to my home. It looks like the ingredients of a really grand spy story, because this ties together the Cold War with the new one.

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26:11And we're back. Now, I'm going to use a new term I came up with that's really, really bad, but the Fragile Five, I call them. Amazon, Google, Microsoft, Meta, and Tesla, the ones investing all the money in the GPUs, are holding up the US stock market by funding NVIDIA's future growth story. And this is really the first big takeaway I want you to take from this three-parter. To be clear, I'm not saying that any of the Mag 7 are going to die, just that five companies spend on NVIDIA GPUs largely dictate how stable the US stock market will be. if any of these companies but especially nvidia sneeze your 401k and your kids college fund will probably catch a cold i realize this sounds a little simplistic but by my calculations nvidia's value underpins about eight percent of the value of the u.s stock market at the time of writing it accounts for roughly 7.5 percent of the s &p 500 an index of the 500 largest u.s publicly traded companies a disturbing 88 as i mentioned of nvidia's revenue comes from enterprise scale GPUs primarily used for generative AI, of which five companies spend makes up over 42 % of its revenue.

27:11In the event that any one of these companies makes significant changes to their investments in NVIDIA chips, it will likely have a direct and meaningful negative impact on the wider economy and markets. NVIDIA's earnings are effectively the US stock market's confidence, and everything rides on five companies. And if we're honest here, really four companies, as Tesla is 0.9 % of the investment GPUs of those five companies. Buying GPUs for generative AI or to train generative AI models were still these services while losing these companies massive amounts of money don't really produce much revenue, meaning that the AI trade is not driven by any real meaningful revenue growth.

27:49But Ed, Ed, Ed, they said, they said points of growth, silence quiet nothing more out of you any of these companies talking about growth from ai or the jobs that ai will replace or how ai has changed their organization are hand waving to avoid telling you how much money these services are actually making them if they were making good money and experiencing real growth as a result of ai they wouldn't shut the fuck up about it they'd be in your ear and up your ass hooting and hollering about how much cash they were rolling in and they're not because they're not rolling in cash and are in fact blowing nearly 100 billion dollars each to build massive, power-hungry, costly data centers for no real reason.

28:26Don't watch the mouth, watch the hands. These companies are going to say they're seeing growth from AI, but unless they actually show you the growth and enumerate it, they are kind of lying. They're lying in the way that you're allowed to. But head, head, Amazon Web Services took years to become profitable. People said Amazon would fail. So this is one of the most annoying and consistent responses to my work. And it's when people say that either Amazon or Amazon Web Services ran at a loss and that Amazon Web Services, which pretty much was the invention of modern mass market cloud compute infrastructure for running stuff on the cloud, lost money and then didn't.

29:01Here's the thing. This statement is one of the things that people say because it sounds rational. Amazon did lose money and Amazon Web Services was expensive. That's right. Right. It's obvious, right? The thing is, I've never really had anyone explain this point to me. So I finally sat down. I'm going to deal with this criticism because every fucking person who mentions it thinks they just pulled Excalibur from the stone and can now decapitate me. They claim that because people in the past doubted Amazon because, or in addition to the burn rate of the AWS systems as the company built out its infrastructure, that I too am wrong because the analysts were wrong about that.

29:34This isn't Camelot, you're a rube, you are not King Arthur. And now I will address both the argument itself and the they part of it too, because if the argument is that the people who got Amazon web services wrong should not be trusted, then we should no longer trust them. The people who actively propagandize something wrong we shouldn't trust them right right well you'll never guess who's now saying ai's good oh i'm going to get there don't you flippin worry but if i'm honest i'm not sure where this argument came from because there is to my knowledge no story about amazon web services where somebody suggests its burn rate would kill amazon but i'm a curious little creator so let's start with an obvious one the obvious point i want to give a shout out to harry mccracken a fast company for bringing this one up to me it made may 31st 1999 there was a piece that everybody is thinking of called amazon.barman the writer jacqueline doherty was mocked soundly for being wrong about amazon which has now become quite profitable the article along with the other sources that form the basis of this episode are going to be linked in the spreadsheet and as a as a surprise i'll actually update it i also want to be clear that amazon web services did not launch until 2006, and Amazon itself would become reliably profitable in 2003.

30:47Technically, Amazon had opened up Amazon.com's web services for developers to incorporate Amazon content into their applications in 2002, but what we consider Amazon web services today, Cloud Storage and Compute, launched in 2006. But okay, fancy pans, what did she actually say? We quote Doherty. Unfortunately for Bezos, Amazon is now entering a stage in which investors will be less willing to rely on its charisma and more demanding answers to tough questions like, when will this company actually turn a profit? And how will Amazon triumph over a slew of new competitors who have deep pockets and new technologies?

31:19We tried to ask Bezos, but he declined to make himself or any other executives of the company available. He could ignore Barron's, but he can't ignore the questions. Bang a line, by the way. Amazon last year posted a loss of$125 million, which is about $242.6 million in today's money, on revenues of$610 million, so about$1.183 billion in today's money. And then this year's first quarter, referring of course to 1999, as the company posted a loss of $61.7 million, which is$119.75 million in today's money, on revenues of$293.6 million,$569.82 million in today's money. I realize that was a real motherfucker of a quote, but it's necessary.

31:58Her argument for the most part is that Amazon was burning cash and had a ton of competition from other people doing similar things, and that analysts backed her up, and they really did, by the way. Again, I quote, the first mover does not always win. The importance of being first is a mantra in the internet world, but it's wrong. The ones that are the most efficient will be successful, says one retail analyst. In retailing, anyone can build a great looking store. The hard part is building a great looking store that makes money, which is a good point. Fair arguments for the time, though perhaps a little narrow minded.

32:27The assumption wasn't what Amazon was building, and we, by the way, are referring to Amazon.com, the store, was a bad idea, but the Amazon wouldn't be the ones to build it and again we quote once walmart decides to go after amazon there's no contest declares carl bernard president bernard's retail trend report walmart has the resources that amazon can't even dream about which is true at the time but in simpler terms amazon's business model was not in question people were buying shit online in fact this was just before the dot com bubble burst when people had insane optimism about the future of the web yet the comparison stops there people obviously like buying shit online it was the business models of many of these web pioneers that sucked looking at you web van but we're going to talk about amazon web services and the less technical of you i want to explain something aws is a really important company i'll kind of get into those details but people like to argue about it and say well it lost a bunch of money so you know that means the generative ai should lose a bunch of money too and that's how it works i'm going to substantively and repeatedly explain why that is so goddamn stupid.

33:30I'm sick of the argument. I'm sick of it. Breathe, Edward. Breathe. They can't get you behind the microphone. Okay. Amazon Web Services was an outgrowth of Amazon's own infrastructure, which had to expand rapidly to deal with the influx of web traffic from Amazon.com, which had become one of the world's most popular websites and was becoming increasingly more complex as it sold things other than books to multiple international locations as well. Other companies had created their own infrastructure, but if a smaller company wanted to scale, they basically needed to build their own thing. It was a massive barrier between companies and building web services.

34:04And it's actually kind of cool what Amazon did. I hate to look rosy-eyed, find rose-colored lenses. I don't know the phrase that Jeff Bezos, but I don't know. Remember, this was early 2000s before Facebook, Twitter, and a lot of modern internet we know that runs on services like Amazon Web Services or Microsoft Azure or Google Cloud. They basically invented the modern concept of cloud compute but we're here to talk about it amazon web services being dangerous for amazon and people hating on it the thing that allegedly happened right i do hope all the people that said this to me didn't just make it up oh my god they did a november 2006 story from bloomberg talked about jeff bezos's risky bet to run your business with the technology behind his website saying that the wall that wall street wanted him to mine the store bezos referred to as a one-time internet poster boy that became a post.com piñata.