OpenAI’s Ghibli Moment, CoreWeave's IPO Letdown, End of Silicon Valley’s Monopoly?

28:23I don't think that's entirely necessary. I think, by the way, people are investing ahead of the demand that they're seeing today, but they are projecting much bigger demand. So there's two sides to this, I would say. One, he's absolutely right that people are investing ahead of the demand that will get an ROI. why? Two is he's wrong in that these these servers are being used without customers. They clearly have customers. There is use. And that's that's like very important, I would say, because if you don't have people adopting this technology, you're not going to get anywhere. Now, we can say that the use is not for the best financial purposes.

29:03Like I remember when I had access to Facebook's M, which was an early version of their assistant, which had humans basically on on the other side of it, we asked it to draw pictures all day and basically maxed out its capacity because it was just people drawing pictures all day. And so that's what's happening effectively with these servers, just it's the AIs that are doing it. I would say to crystallize his argument, there's this belief that the next generation of AI is going to be really financially renumerative because it's going to do things like automate all coding. And I think that his argument would be stronger if he says that, that the speculation that they're being built on is that AI is going to do things that we don't know if it will be able to do within the next two, five, or even 10 years.

29:49And that is where the problems are. And so even if OpenAI is melting its servers today, even if Google are melting their servers today, if there isn't a return on investment with these higher value propositions in the next few years, there's going to be a timeline mismatch and that's going to be bad. Web 2.0 happened because there was so much overbuild out of fiber capacity that it was incredibly cheap for someone to create a Facebook in a dorm room. And so a lot of investors got wiped out in the dot-com bubble bursting. But then a thousand flowers bloomed and Mark Zuckerberg became a billionaire.

30:31Yeah. Yeah. So that brings us to CoreWeave, which as of now has not yet IPO'd. CoreWeave, for those wondering, I'm just going to read from CNBC, it provides access to NVIDIA GPUs for artificial intelligence training and workloads. And it counts Microsoft as its biggest customer by far. Other clients include Meta, IBM, and Cohere. Its revenue soared more than 700 last year to almost 2 billion, but the company recorded a net loss of 863 million. Their IPO is going to be a big disappointment. They initially priced at$40 per share. That valuation will be$23 billion. It's way down from the$32 billion that bankers had been floating in recent weeks, almost$10 billion less than they anticipated their valuation would be.

31:24And they're going, I think, down from$2 billion raising in this IPO to$1.5 billion. and that is going to be, you know, are they going to be able to cover even their losses with that type of money for a year or two? Also, I don't know if you know this, but part of what they're raising that much money for is they're retiring a ton of debt because again, they're extremely capital intensive as a business. And so when you see the headline that they potentially will raise one and a half billion dollars, not all of that's going to their bottom line because they're immediately going to be attempting to retire debt.

31:56By the way, just for my listeners of the show, since we're going to cross post this on. I screwed up today and I thought that the IPO had happened. But Alex, the fact that we are talking at almost 1.30 Eastern time and it hasn't floated, the fact that they had to bring it down from the range that they wanted and the fact that it's not, then this is bad news. Oh, yeah. So they just opened and they're opening at$39 per share. Okay, so under even 40, which is what they priced at. Under 40, which is really bad. I mean, you're going underneath what you... They were indicating to the market that they might come out.

32:30Like usually after the IPO, there's this little pop, which is basically just people buying. It means that the IPO was sort of mispriced because everybody that gets in early, you know, they ended up spending. They end up getting less for their money because the market is willing to give it more. In this case, there's clear bearishness in the market right away. It's already underneath its IPO price of$39. Very bad. not a good situation for core if it closes today like let's call it like a a 37 or worse or something uh that's that's extremely bad news but the damage the damage was done basically in the ipo itself where they just weren't able to raise the amount of money that they were and now now now we see the public also turning on them which is which is pretty interesting not in a big way but enough to be like what the hell is happening let's contextualize this because i called it on my show the first ipo of this ai era but they're not an ai maker um they're a different sort of company they're a company that provides the chips right so one of the context here is the first gold rush in this ai moment was as we've been discussing we got to get our hands on these nvidia chips like this this is the this is the oil this is the the commodity that we need to make this revolution happen.

33:54So essentially, the argument would be CoreWeave is a picks and shovels company, although they lend you the picks and shovels. And they don't even make, yeah. They buy the picks and shovels from somebody else and lend them to Microsoft, basically is what they do. So number one, everyone's looking at this as tech in general hasn't had a lot of big IPOs for a few years. So this is a big one. But number two, this is the first of the AI era. So is this a bad sign for the appetite in the public markets for AI companies? But is it really an AI company? And then is this company specific? I believe that you spoke to folks at The Information that have a very specific analysis of this.

34:38Like CoreWeave has something like 70 % of its business is one customer. Microsoft. Microsoft, right. And if what your concern is, is that, again, Jevon's paradox isn't working out, then things will get cheaper and cheaper and cheaper. And so you don't need a core weave to get you your chips because you can do it cheaper and all that other stuff. So is this a company specific issue where they don't have a moat? I think it's company specific. And I also think that it's still on a trend, right? I'm going to go with your line, Brian. Both can be true at the same time. Right. It's not a strong company in terms of what you're looking for if you want to get AI value.

35:23And AI has been on a downturn at the beginning of this year. And it's not good for a company that wants to ride that wave. And you're right. This is from the information. So this is from Corey Weinberg. He says tech investors, and this is making the point exactly, seem a bit overstuffed on AI stocks. Oracle and NVIDIA, two public companies investors, might compare to CoreWeave, are down 12 % and 19 % respectively on the year. It's hard to ask investors to pay up for a new AI firm when they're worried about their existing portfolios. Investors also worry how much the business is tied to Microsoft or NVIDIA.

35:59They worry that this is important. The CoreWeave founders sold so much of their stock already. I think they sold something like$500 million. They worry how much cash the company expects to burn, which is a lot. And this is more from Corey. A bank anonymously surveyed 135 investors, including hedge funds and long only stock pickers. A whopping 90 % of the participants said they didn't think, Core, we've had a sustainable moat. Essentially meaning it wasn't really a good long-term investment. Here's the money quote. Someone said, it's radioactive and I think every investor knows that. So it's not a strong business at a moment.

36:35Well, it might be a strong business. I don't know. But it's not a strong long-term investment, at least according to these bankers, at a moment when people are kind of pulling back on AI. Alex, you know what this is, and we haven't had one of these in a long time. This is a perfectly timed IPO. And I'm not casting aspersions. You mentioned that the founders have cashed out a lot. But sometimes companies ride a wave, and they're private, and you try to get to public markets before that wave dissipates. and I think that we're watching that happen right now. Wouldn't it have been great though if they went like a year ago?

37:13It would have been better for the people that invested in this IPO. Way more money. I mean, without a doubt. There was a reason they were hitting a certain valuation then. Yeah, but they also, you know, their revenue was up 700%, I think it was, over the last 12 months. So they had, it's all, again, it's all timing, Alex. So you had to wait until you could show that level of revenue growth to achieve. If they didn't have 700 % revenue growth over the last 12 months, they wouldn't have been able to get$10 billion in public markets. For sure. But talking on timing, I do think what this is also showing is that the euphoria and the unquestioned money spigot for AI is over.

38:00And I texted Corey, who wrote the story. I said, what's going on here? And he said, I think people are just stopping. This is what he wrote back. I think people are just stopping and thinking about how companies are actually going to make money in AI and who's going to be left holding the bag. I don't think that was the case a couple months ago. This is definitely AI entering this new era where people are thinking about, yes, the ROI, the sustainability of the businesses. And I don't know, I think that's going to make the AI industry, make everything more difficult for the AI industry than it has been up until this point agreed but it's interesting to me that you're willing to make a state you're willing to make a claim there um because again apologies i i wrote a book about the history of the internet and the the dot-com bubble was not a straight-up rocket ship you had you know the the asian flu crisis you had the long-term capital management crisis like there were times when people were like okay the boom is over the boom is over the boom is over these things move fast and we could be talking again in three months and there's more euphoria because open AI lists to go public or something like that.

39:09And so I like the call. I agree with the reasons that you're making that, but I would also say, talk to me in three months and we could be talking about something completely different. Yeah, it's a great point, Brian. And I wrote this down in our show doc, which was just sort of this thing that I've been scratching my head about. And I'll just read it. I don't get how the market is pulling back on AI because the technology is as cool as it's ever been. It's getting more efficient and we're also seeing massive data center buildouts and chip buyers out of chips. So what's happening? I mean, to me, and this is basically to crystallize the point, the technology, like we saw with the Ghibli segment we did at the beginning of the show, the technology is absolutely cooler than ever.

39:56It's doing all the things that, well, maybe not all the things, but it's doing many of the things. But is it profitable? Well, it's not profitable, but it does seem to be on this path to be able to do. I mean, you could run, I don't know, old ChatGPT and run it profitably, but the losses are coming to try to build what's next. And then that will become more efficient. So it is interesting to me that the market is not turning on this technology, but cooling on this technology as it continues to advance more and more and gather more steam among people. Let me ask you this real quick from your perspective, because I'm interested in talking to you because you're deep in this stuff.

40:33If we get a lot of signs like we've been getting recently that there is a CapEx pullback on data setter spend, is that bullish or bearish for AI? Because obviously it's bearish for certain segments of the AI market because that spend that they were planning on might not come. Or is it actually bullish? Did I say bearish last time? Anyway, is it actually bullish because that actually means that things are coming down in terms of cost in sort of like the Moore's Law sort of way that we're used to with technology so that now if it's cheaper, then it's going to it's going to happen more and there will be more chances for profitable companies to be created.

41:12I will say I don't think it's going to happen because the CapEx pullback. I don't see it happening. We have big tech that's going to spend 300 billion on CapEx this year. Plus much of that is going to AI open AI. There's rumors now that are reports really that they're about to raise$40 billion. They raised 6.6 billion last last year and it was the biggest VC round ever. Or could you imagine them raising 40? That's crazy. Well, Masa likes to do things big. Yeah, that's money. That's money. So I don't see a pullback coming. I think the Microsoft headlines were largely Microsoft saying we had this dedication to open AI.

41:53We were trying to build out for them. They're going to go do it on their own now or with other partners or with a diversity of partners. We don't need to do that. We're seeing everybody out of GPUs. We're seeing all those GPUs being used. We're seeing bigger training runs happen. I don't see the pullback happening. And if we do see a pullback happening, I will view that as a bear sign here because I just think that like this stuff is going to be very expensive and they're going to need all the gpus they can find to serve it and then we'll once they do that we'll then see um basically improvements of models and then we'll try to they'll try to do the next yeah but that's my argument and we don't have to go into this that that if if the costs do come down that's actually bullish for the ai as a technology being becoming pervasive across all of tech and society but right but we're gonna have we're gonna have Dylan Patel from Semi Analysis come on the show in a couple of weeks, maybe next week.

42:49No, definitely in a couple of weeks. And what he basically said, I'll just preview it. What he says is basically it's this step thing where like you advance your capabilities and then you find ways to make that more efficient. You advance your capabilities and you find ways to make that more efficient. And so it's a step, but that always will require spending a lot more money to advance your capabilities. And then you can use that stuff in a much cheaper way. So yeah, Brian, And we should definitely talk again in three months and we can see where this thing is going. But before we go, I definitely want to get to your story about the future of Silicon Valley.

43:23You have a pretty provocative piece on YouTube, and I want to hear your thoughts on it. The title is, Is Silicon Valley About to Lose Its Monopoly on Tech? My Thoughts on Sovereign Tech Stacks. So can you run us through the argument, and then I think I'll debate you about it a little bit. Yeah, real quick. Um, so, uh, this was something that I, I did a bunch of stories this week about how Europe is maybe going to pull back on, on buying, um, us cloud infrastructure. Um, there's been a bunch of stories like that about recently, like the, uh, people don't want to buy American because they're concerned about, um, you know, here's the thing.

44:02Um, what if the rest of the world did to us what we've been doing to China in terms of like import bands, export bands, things like that, where we don't feel like your tech is safe to use internally. The, you know, the, the argument that has been made that we've been covering for years now is you have to onshore chip development, silicon development, because if you, if you lose access to chips and China invades Taiwan, what your economy is screwed in the same way that If you lose access to oil, your economy is screwed. The term that is being bandied about in recent weeks is tech sovereignty. So the argument is that if people felt that way about Silicon, about the chips themselves, now it's moving to the entire tech stack.

44:50If you are a country that feels like, oh, we could lose access to databases and cloud computing, and even social media, because social media is the modern communication network in the same way that you would fear in a war that an adversary would take down your telephone network or whatever. So people around the world, and in my piece, we're talking a lot about Europe, are starting to pull back and say, it's not just chips, it's everything, it's the entire tech stack. So the argument that I'm making is that Silicon Valley for at least 30 years post-Cold War has had essentially a monopoly on the tech stack, right?

45:33And also we made the best stuff and brilliant innovation and things like that, but we were the default option. No one ever had a motivation to choose other than Silicon Valley, right? So now if for geopolitical imperatives, for cultural reasons, people are starting to reconsider that Silicon Valley for the first time is not the default, does not have the monopoly on the tech stack. And the example I use is Aaron Droll, Palmer Luckey's... Androll. Androll, sorry. I never can pronounce that right. It is tough. The defense tech startup. And right now, Europe is rearming. They should be, it should be boom times for them.

46:26Except Europe's not going to buy from an American tech company because reasons that we don't necessarily have to go deep into. But they wouldn't trust American tech. And it's not just, oh, maybe they'll spy on us. Maybe they'll do a kill switch and stop our drones from flying or something. They're afraid of tariffs, export bans, where all of a sudden you lose access to the supply chain, right? Extrapolate out beyond that. And you have things like Europe saying, we need local cloud because we don't know that if a trade war happens that maybe as part of the trade war tit for tat, we lose access to our data.

47:07And then you layer on top of that what we've been talking about with AI. And I make the point in the piece that AI is the first new technology in 30 years. It was born in Silicon Valley. Silicon Valley is still the leader of it. But for the first time at the nascent stages of this technology, it's not a Silicon Valley exclusive. It's not a monopoly. There is Chinese tech. There's Middle East, Chinese AI, Middle Eastern AI. There's different flavors of this. And so my argument is, does the business model of Silicon Valley, is it prepared for the fact, a reality where instead of addressing 90 % of the global market, the market is bifurcating, the market is fragmenting, and scale no longer means potentially every human being on the planet.

47:55Scale means maybe you can only sell to certain markets and maybe your own local market. So let me, I'd love to hear your thoughts on that, because I value your opinion on stuff like this. Yeah, so when I read your story, I was like, all right, well, let's see how much like losing a market like the European market might hurt for the tech giants. Actually, even a small decline in Europe would hurt tremendously. Apple sales in Europe, 26 % of total revenue. Meta's ad sales in Europe, 23 % total revenue. Amazon's international sales, 23 % of total revenue. And let me interrupt real quick because I want to say another thing that I say in the piece is someone could do to meta what we have attempted to do to TikTok, which is to say we're going to ban Instagram.

48:39Right. So it's not just like hard tech or software. It's also tech tech because, you know, social media is media and it's communications. I'm sorry. Go on. Yeah. So that being said, I don't see Europe banning these these software platforms. I just think that you make your citizens really angry. They're restricting future development of it. You see Apple, you see Facebook say we're just not going to roll out our AI products within Europe. But to take something away like this you saw how hard it is for the US to do it with TikTok. I'm pretty sure TikTok's still working. I was on it this morning even though the US really wanted to ban it.

49:19I don't see them taking it away. Let's pull back from a ban because the better example is the piece from, was it Wired, where that European companies are starting to say, we need the cloud onshore. The idea is onshoring for things like the cloud, for things like software, in the same way that onshoring or reshoring for chips becomes a geopolitical necessity, a sovereign imperative, essentially. So like, if you were, again, I don't have an opinion on on the this current administration's policies but if you're in denmark and you are gonna buy a cloud uh services and storage and things like that maybe you do want to consider having your cloud be local right what would you say to that i think you're gonna go with best in breed i mean i think you'd have to anticipate that the risk of like true uh geopolitical fissure between the US and Europe is present.

50:21And even though like it might be in a rocky place right now, I just don't see that full separation happening. I'll tell you why. So I would still go best in breed if I was building. I mean, a world where things get so bad between the US and Europe that your AWS stack is at risk is to, I mean, maybe I'm not imaginative enough, but is to me so far fetched that I can't fully, I wouldn't say a company would begin to change its strategy on it. But that being said, there was a piece, part of your piece that I think is totally spot on and actually bears paying attention to. And that is that basically the US has had a monopoly on tech for a long time.

51:08I mean, of course, we know there are, I mean, Spotify, for instance, which we're broadcasting on today is a European platform. So not a complete monopoly, although certainly U.S. companies have tried to squeeze these companies. I mean, Spotify is one of Apple's biggest opponents because of App Store revenue. But AI is, however cliche it sounds, it's a democratized technology. I mean, we're seeing models come out of really China. I mean, DeepSeek, and we're going to have a China episode coming up as well, going into all the different... um and and don't sleep don't sleep on the middle east the middle east because you're you're right i mean basically i'm going to give you a moment to talk about the middle east but basically if this is a technology that requires scaling infrastructure and if you have unlimited you know energy for sure in the middle east and resources you can compete and they can compete uh yeah i i don't want to talk about the middle east but i'll give you one more wrinkle to the argument that I'm making, which is that essentially Silicon Valley tech has been the default.

52:11There's never been a motivation to choose otherwise. There is a motivation for the first time. And I agree with you. Listen, tomorrow, this administration's positions may change. There could be another administration in a few years. But I think the genie is out of the bottle in the sense that if people start to realize the geopolitical necessity of the tech stack as being existential, even if everything goes back to we're all friends and kumbaya, whatever, people have learned this lesson or have gotten this fear in their hearts. And I think that that is for the first time changing why people would make decisions.

52:56And it only takes the genie being out of the bottle for there to be, well, okay, maybe there's a market now for just a European cloud. Maybe there's a market, we keep using Europe, for India. If Europe doesn't want to buy US defense tech, does India? Does Brazil? And so go down the line in terms of cloud, or every product is a tech product now. So I can't buy a Chinese car right now. What if India doesn't allow US smart cars and smart TVs to be sold there. So my point is, is that one of the things that Silicon Valley has assumed for 30 years is that we can sell our products to 90 % of the planet.

53:37But what if the global market starts to fracture and become localized and localized? And then the last point to layer on top of that is, is what does that do to the talent? Because the talent for the last 30 years around the world has come to Silicon Valley, because that's where you go to achieve scale to reach 90 % of the planet. But if you can stay home and have an addressable market that's India, an addressable market that's Latin America or whatever, and it is a fractured world, then the talent doesn't come to Silicon Valley. And that's why, listen, I say in the piece, people have been saying since I got into tech, chicken little stuff, Silicon Valley is about to die or whatever, and it's never come true.

54:17and I've never believed it, but I see the angle for the first time where I'm worried and I love Silicon Valley and I'm American and that's from my perspective. So that's why I wrote that piece. Yeah. I mean, I think that, yeah, if there is a separation, it's going to be, if this, if the separation of this magnitude happens, it's going to be worse than just like Silicon Valley losing its dominance. But it is challenging. It is challenging, I think, for companies outside of Silicon Valley to build in the same way. It doesn't mean it can't be done, but the concentration of talent and capital, and you know this because you wrote the history, and the tolerance for risk is really unmatched outside of that area, really.

55:04And it'll be tough for the rest of the world to catch up or displace. But this is the thing. Let's end here, because you mentioned you can't buy a Chinese car. You can, I think, but it's just a 100 % tariff. I can't buy Chinese phones. Think about, we don't have to get all the way there. We get a little displacement. Think about what's happened to Apple in China. It became a point of national pride to not have an iPhone and to have a Huawei phone, Huawei Mate. And Apple is still 15 % of its revenue in Q4 was coming from China, but that wasn't the 18%. And that has dogged Apple revenue for quarters.

55:47The fact that their revenue isn't up to China standards. So it doesn't have to be an earthquake. It can be a ripple and that can be quite destructive. Right. And talking to Mr. Big Tech himself, that's one of the concerns for me is in a fractured market, if an AWS has to go market to market, as you know, the phrase is always write the code once, sell it everywhere. if that if that world changes my only point was is i don't think people are talking enough about what would happen if the world changes in that way where you have to you know oh europe is regulating us so maybe we have to change our software for the european market but what if every market is different and you have to go bespoke market by market um if that happens that is that is very different than what silicon valley has been used to for 30 years definitely Definitely.

56:40And another thing that Silicon Valley has not been used to is dud IPOs, especially bad AI trading. CoreWeave is now down under$39, down 3.77 % on IPO day. That will change before the market closes, but not exactly what they've been hoping for. And certainly a day that we'll come back to and maybe in our three-month recap, Brian, we'll see. Was that just a data point or was that a sign? I'm calling it if it's under 37, that is very bad news by close. All right. Brian McCullough of the Tech Meme Ride Home podcast has been here with us. You can find the show in your podcast app of choice. Just type in Tech Meme Ride Home.

57:20A really nice compliment to big technology. You can come to us on Wednesdays and Fridays for our interviews and news recaps and go to Tech Meme every day for the latest in what's happening in AI and the rest of the tech world. So, Brian, always great to have you on. Thanks for coming on the show. Alex, one of the funnest conversations I've had in a long time. Definitely. All right, everybody. We'll be back on Wednesday with Ron John Roy. More AI news coming your way. And then we'll have a special guest coming and joining us next Friday. So hit subscribe. If you're not subscribed already, you're not going to want to miss our show coming on Wednesday and then on Friday.

57:54Thanks for listening. And we'll see you next time on Big Technology Podcast.