Where Brad Gerstner Is Investing Billions

0:00Welcome back. How are you doing? Great to be here, guys. Great to be here. Fantastic. Back to back with Kyle. Yeah, yeah. He laid out one of the greatest SpaceX bull cases. We're going to throw it to you to try and one up him. He said, whoever controls space controls the world. And for that reason, you got to own SpaceX. I liked it. But take us a level deeper. What are you thinking about in the SpaceX IPO in the lead up? What are you watching for? What unanswered questions are there? What do you think is misunderstood maybe that more people should be aware of? I mean, come on, guys. We didn't even have any foreplay.

0:32You're already trying to be down. You know, and the SpaceX IPO. I mean, first, I haven't seen you guys. Did you sell this thing? Did you sell? Yeah, I think we did. I think we're working for you now. I think we're working for you now. Did you guys get shares in OpenAI when you sold this thing? Yeah. Everybody on the team. So we're all on OpenAI? Yeah, yeah, yeah. How much money did you make? Yeah, that's the question. I mean, we got to turn the tables a little bit. Anyway, let's talk SpaceX. Well, maybe before that, we can rewind a little bit, because I do remember the last time we were hanging out in person.

1:09It was at Katzenberg's event, right? It was kind of this interesting moment, because in some ways we were going through a mini correction, right? Like chatbots grew incredibly quickly. Agents were just starting to work. and it's been interesting to see how the market did go through this correction in Q4, but then realized, hey, whoa, agents are a thing. And you had pretty much perfectly called that in the conversation that we were having, which, yeah, in some ways it's just been such a wild year for so many reasons. But I feel like you had somewhat of a crystal ball back then. Well, I mean, thank you.

1:51and I recall that conversation. And the truth of the matter is we've gone through several mini corrections over the course of the last two and a half years, right? There's been a wall of worry. I mean, on my podcast with Bill, Bill Gurley, you know, we debated this. You know, Bill was saying, will the revenue show up? Will there be gross margins? Will there be ROI? We're overbuilding. Are we, you know, every supply constraint turns into a glut. And we saw all that wall of worry last year. I mean, I think for me, the turning point was when we hit inference time reasoning and we really had this whole other vector of scaling intelligence.

2:30And I remembered having Jensen on the podcast. He said, Brad, inference isn't going to 100x, not going to 1 ,000x. It's going to 1 billionx because agents are going to be talking to agents. Right. And so I got very pilled. And then when we saw Opus 4.6 in the beginning of December, it was clear that we had crossed a threshold of intelligence that offered a level of utility that was fundamentally different. And if you were paying attention early in December, you could see that coming. But we started the year with the market very skeptical as to whether or not AI revenues would show up. And let me tell you this.

3:05Had Anthropic not delivered its revenues that it's delivered this year, I think the stock market would be down 10 or 15 percent. I think it's that important to the entire narrative, because the fact of the matter is OpenAI has not blown away their numbers. Google has not blown away their numbers. Like, numbers have been good, but the fundamental driver of outperformance in terms of offtake of AI revenues has been Anthropic, which is the fastest growing company in the history of capitalism. So that buoyed the entire AI segment. And it was when they started posting those numbers and then they said on top of that, we're doing it at high gross margins in a way that in Q2 may in fact actually lead to free cash, some positive free cash flow.

3:47The market really ascended. Remember, two months ago, the market was basically down on the air. And a lot of these returns, we just had two of the biggest months in the history of Altimeter's public funds. That's 18 years. I mean, we're going back a long time. But that's, you know, listen, I think we picked some pretty good stocks, memory, logic, etc. But I also think it's just a function of the market delivered. These companies delivered. You saw Dell's, I mean, listen, Michael Dell, one of my best buds. And you watch the act, you know, that he's delivering with Dell. They just had AI server revenues up 750 % year over year.

4:23Went from a$1 billion business to a$16 billion business. This stuff is real. But in order for it to stay real. We have to continue to see usage by consumers that they're willing to pay for and growth in the enterprise, small, medium, large that they're willing to pay for and growth in the sovereign domain. I think it will occur. But oftentimes, you know, there'll be some pockets along the way here where, you know, where revenues won't be as strong as people think. We'll have some pullbacks. We could have 10 to 20 percent pullbacks in the semiconductor stock as just like run of the mill consolidation.

4:56Yeah. Yeah. Right. Run of the mill consolidation. I mean, Micron has gone from a couple hundred bucks to a thousand bucks. Dell this time last year was, I think, 80 or 90 dollars. It's now at four hundred dollars. These are seismic moves. Yeah. Right. And so, yeah, fortunately, we were pretty bullish when other people were skeptical. Yeah. But yeah, it feels like it feels like there's there's like this natural reaction. Anytime there's good news, someone has to dig up something that's like a little bit bearish. Right now we're seeing, you know, incredible anthropic revenues. And then there's questions about ROI on token maxing and how much is going on there.

5:32How are you processing that? are you thinking that we'll see CEOs and management teams on the next earnings cycle sort of start to dig into those numbers or is it just the more on AI psychosis? Yeah, well, that's the most extreme version. The other one is, yeah, we actually did spend half a billion dollars in a month and a quarter billion was super effective. So that's what we're doubling down on in the coming quarter. But how do you think that shakes out? Well, I mean, if I size up the debate in silicon valley yeah right there are the the bears who've been bearish on ai for let's call it a while and anything that comes out anything that comes out is actually just still very bearish right and so now they're saying oh all this ai revenue is bullshit first they were saying it won't show up at all yeah and then it showed up and then they're saying oh it's all bullshit because it's all token maxing and there's no no roi so that's one side yep on the other side of the people who are super ai pilled and they're like oh no this is perfectly you know pareto optimal everybody's spending the exact right amount of money on tokens which we also know is not true and the truth buys in the center okay when you have millions of independent actors all making self-rationalizing decisions like altimeter on buying tokens right i don't like i don't like to waste money yeah i'm spending money because i'm getting a return now will we will we experiment with some things that don't provide a return of course i actually sent you guys a slide on this i think it's pretty fascinating i don't know if your team can pull up but this is independent research that we did on this question of of token maxing and what we did is we went to 300 enterprises right and we just asked them are you starting to optimize your spend and if so how much do you expect that you're going to spend year over year over the course of the next 12 months and if you leave that chart up what you will see guys is that in the first category, these are all people who are actively optimizing, but they still expect to grow revenues at over 50 % over the next 12 months.

7:32The second category are people who are planning to optimize. And even if they're planning to optimize, they say they're going to grow revenue at 90 % and so on. So here's my point on this, right? And this is across 300 firms who use a multiple of AI solutions. This is what they expect of their AI, you know, API token usage. Yeah. So what are we what does that tell us? It tells us that, of course, people optimize along the way. But we are so early in the adoption curve. Right. They're barely using coding today. They're just getting on the coding train and they haven't really even started on using AI for knowledge work more generally.

8:12So we're low in the use the penetration of coding as a use case. We're almost nowhere in the penetration of knowledge work more generally as a use case. And then remember this, there are very few enterprises globally that are even using AI. So we are really early in the curve of the people who are actually using AI. So I'm somewhere in the middle. Of course, I believe that optimization will continue. But my hunch is that Anthropic and OpenAI, these companies will continue to grow right through the optimization because the growth curve on penetration of both enterprise and use case is so steep.

8:48But, you know, we'll see. Yeah. Is this a zero-sum market where every dollar spent on tokens comes out of a SaaS company? How are you reflecting on the SaaSpocalypse? Because we all saw what happened in the market, but there's been some really good news lately. How have you processed that? Well, I popped on CNBC for a second yesterday and was talking about Snowflake as an example. And the stock was up, what, 35 % yesterday. Now, of course, just to be fair, it's only up 10 % for the year compared to a company like Micron up 200 % for the year, a company like Arm up 200 % for the year. But they did bounce back.

9:27And what I think we're starting to see is the bifurcation. There are companies that are in the token flow. So all these software companies, we just lump together. We treat them as though they're all equal. But there are certain software companies, Databricks, Snowflake, and ClickHouse, all of which we're investors in. And it's very clear to me, they're in the token flow. As you consume more tokens, the amount of your database queries goes up. I see it at altimeter. In fact, our database queries are growing faster than our token usage, to give you a sense. And this is, I think, so now they've proven they're in the token flow.

9:59So they're starting to get some love from an AI multiple perspective. That's very different than a company, I think, like Salesforce. And I love Mark Benioff. And if anybody can get in the token flow, it'll be him. But the reality is the front-facing solutions that they offer are more competitive with the models than something like Snowflake. Snowflake's the enabler of the models, whereas I think that Salesforce competes a bit more, so it's going to be more challenging. But I also – I've heard so much about the SaaSpocalypse. And listen, I did a pod with Satya, I don't know, 18 months ago where he caused a stir by saying software is a thin user interface on top of a CRUD database.

10:39And Benioff and everybody freaked out. They're like, what are you saying? It's way more than that. Right. And Bill and I did a pod is software dead. So it's not like this is new. But then everybody started freaking out in December. All these multiples reset. But the question is, what did they reset to? OK, and this is what I want to focus on here. So if you show this slide that that I prepared for you, fine, esteemed gentlemen. You know, what this slide shows is that the multiple correction just took software from a place where they were way more expensive than the market multiple and brought them into the category of the market multiple.

11:18Right. So now they're trading at about 22, 23 times real SBC included gap earnings. That's about where the market is trading. So now just follow me on this. Software is trading. Mostly software names are trading at a higher multiple than NVIDIA. Right. NVIDIA is trading about 13 times earning for 70 percent growth for the thing that is the most essential thing in AI. And they're there. They're at twice the multiple. So like when I hear everybody crying that, hey, these multiples aren't fair, it looks to me like the multiples reset from an above market multiple where everybody thought the software revenues and earnings were impenetrable.

12:01So now they're saying, well, I don't know. Some of this maybe three, four, five years out will be replaced. So we're going to raise the discount rate. We're going to lower the multiple. They've only lowered it to the market multiple. Let me just suggest that there's a possibility these trade well below the market multiple. Sure. Right. I'm not wishing for that. But I'm just saying there's a distribution of potential outcomes here. If you get on the AI train, if you get in the token flow, you're going to get above market multiple. If you don't, if you slow down and it looks like every time that computational intelligence improves, your business gets worse, then I promise you they will trade below the market multiple.

12:39And there's and there's more room to the downside. So for us as investors, you know, Warren Buffett has this, you know, this old metaphor. You know, there's the easy basket. there's the hard basket uh yeah or the the yes basket the no basket the too hard basket yes for me software today is generally in this in the too hard basket yeah it's notable because you've been saying that i i think for months now yeah and there's a lot of people now that there's been a stabilization that that say like oh i'm i'm smart enough i can i can i i can outsmart the market here and like you're saying even with where multiples are now you still could be catching a falling knife.

13:17I wanted to ask you about the potential data center moratorium and how, you know, the likelihood of something like that in your view, how that would, if you have less capacity coming online, that would obviously be bad for, you know, chip companies, various companies in the hardware supply chain, but it could be great for people that are actually have, you know, basically like have tokens to sell because they would potentially get more pricing power. How do you think it's bad for everybody? Yeah, bad for everybody. But most importantly, it would be horrific for America. Yeah. And lest we be overconfident in Silicon Valley, let's remember the activists, a small group of activists shut down supersonic technology and a small group of activists shut down all nuclear clean energy in this country.

14:12OK, we have 100 fission reactors being built in China. We have one in the United States. It's a disaster that happened. And so we can't take for granted that the kooks who are calling for data center moratoriums, right, which just think about this for a second. All of our GDP growth is coming from the fact that we are building data centers and driving AI and driving productivity improvements in the economy. A data center moratorium would thrust us straight into a recession and high unemployment. Secondly, it would cede the entire global game to China. Like overnight, we would lose to China in the global AI race, which is not just about AI.

14:52It's about economic security. It's about jobs. And it's about national security. So it literally is insane that we would do this. I can't even believe there are people talking about it. However, why are they talking about it? Because people are concerned. Local communities are concerned. I just got back from celebrating my mother's 90th in rural Indiana over the Memorial Day weekend. Congratulations, sir. Happy birthday. Happy birthday. Thank you, boys. She's incredible. She is so incredible. But you think about a place like Mishawaka, Indiana, where they're building a data center. I mean, folks here, they're worried about their jobs.

15:30They're worried about their kids having jobs. And then they're told by these crazy activists who show up in their town, they're not going to have any water and their electricity bills are going to go up. So can we blame these people for being a little agitated about what's going on? So I'm actually working on an initiative. I'm not prepared to announce today. But with like everybody in the value chain, all of the cloud companies, all of the NVIDIAs and AMDs and, you know, and off takers, et cetera, and the White House, that would deliver a very tangible and profound dividend to the communities that we're building.

16:01There we go. There we go. And I think I think it's the there's a very elegant solution there. You're the guy to do it. You're the hero that American capitalism deserves. You got Trump accounts done. I feel like this is a good good next act for you. Well, I'm I'm in the mix. I'm happy to do my part. There are extraordinary people around the table. But here's the thing. We have to build the socio political bridge for the next three years. right in three years it's going to be obvious i think the abundance and the benefits that ai is driving for us as consumers everybody's going to have their own personal assistant in their pocket right for next to nothing think about that yeah can do your calendar can order your food can you know get you a new black t-shirt send mom a birthday present all the things and every enterprise is going to have things that up level us all as humans so i am firmly just like uh you You know, John Maynard Keynes was at the start of the Industrial Revolution.

16:57I am firmly in camp optimism about technological progress. But I'm also not head in the sand about the disruption and the concern people have for the next three years. So we have to give them tangible benefits that get us over that bridge. I think we're going to do it. I'm feeling pretty optimistic about it. But you're right to bring it up and you're right to be concerned about it. We cannot take it for granted. Yeah, I mean, this just goes back. I think it's entirely fair that individuals, you know, if you say, I'm going to put an AI factory in your backyard, okay, is going to create jobs briefly and then, you know, some maintenance.

17:32I think it's totally fair for people to not want it in their backyard because there's some, they perceive some risk and there's no direct benefits because they can just get AI anywhere, right? It doesn't matter where the data center is. But there's a solution. Yep. How are you thinking about adoption curves? It feels like part of the reason that we've had these kind of like rolling corrections is that technology gets adopted really quickly. People assume that it's just a straight line forever, but then there's a new capability, a new technology. And it feels like stuff is just breaking through like instantly.

18:11recently, are you adopting new frameworks internally to try to understand how quickly new products can get to market? Obviously, enterprise is different, but it feels like the line between consumer and enterprise, at least in coding, has never been more blurred. For sure. I mean, listen, I think about when I got into the game, guys, 1999, 2000, and we had about 35 million people connected to broadband internet, right? We all saw what Amazon was going to be, but where we got over our skis, right, is we thought it would come a lot faster and we forgot that there were only 35 million people connected to broadband internet.

18:52Today, we have 4 billion, 3, 4 billion, like the rate of diffusion and the magnitude of diffusion is radically, radically different. And think about this. We have a natural constraint on how fast we can go because we only have so many memory wafers in the world we only have so many logic wafers in the world we only have so much powered shell in the world that means we can only produce so many tokens okay and it's almost as though in 1999 2000 we could only lay so much fiber i've said this a thousand times when we were putting down the fiber in 2000 we called it dark fiber for a reason there was nobody using it and we knew there was nobody using it when we put it in the ground there's not a dark GPU in the world today.

19:37Yeah. Okay. There's not a dark token in the world today. So I think it's a very different thing. I think it's a healthy thing. We have this wall of worry. We can't build that much supply. And I would say, if I look at every company, what did they report on their earnings calls? Google was token constrained. They said, if we had more tokens, we'd be able to generate more revenue. Same for Amazon, same for Microsoft, same from open AI, same from Anthropic. The world demands more intelligence. Intelligence can only be produced with tokens. And we have physical limits to the amount of tokens we're going to be able to bring online so yes we will have these waves but i think the rate the parabolic rate at which these new models are going to produce intelligence i think we're going to be blown away over the course of next nine months you talk independently uh you know to michael truel and the guys at cursor and now you know taking over x.ai or you talk to uh the guys at anthropic or open ai and they kind of look you in the eyes with that Oppenheimer look and they're like, we're here.

20:36Think about this. OpenAI and Anthropic combined to start the year had three gigawatts of compute, three combined. They're going to end the year closer to 10 and end next year closer to 20. We're making algorithmic improvements. We're making massive steps up the scaling law because the amount of compute we're going to have available to us. Think about, you know, macro hard and macro harder that Cursor is going to now be able to train a frontier level model on. So we've got incredible competition in America. We got the right amount of compute coming along. I don't worry about the bubble as much, even though I know that, you know, there will invariably be, you know, some months that revenue doesn't grow as fast.

21:16I'm really worried about making sure that America stays foot on the accelerator, competing globally and winning the AI race like this is going to lead to a moment of abundance for our economy. And it's only through great national wealth that we can raise the floor for everybody else. Yeah, no, that makes no sense. There was some reporting this week that Meta is hiring FDEs. I was sort of surprised to see them going into the enterprise because it feels like they have every advantage on, you know, consumer. They have the billions of users. They have they have, you know, exciting hardware, all these things.

21:59How much did you it was that was that surprising to you at all? Do you expect more companies that weren't traditionally, you know, enterprise focused to say, hey, there's tens, maybe hundreds of billions of dollars of revenue here. We should be we should be in this market. I mean, the second you start spending$100 billion on CapEx annually, you run into the AWS problem. What's the AWS problem? Now I have all this compute, but I don't use it every day equally. Jeff built AWS because he said, I have to build my capacity for Christmas Day or the week leading up to Christmas, Black Friday. But he's like, the rest of the year, half of that stuff's sitting idle.

22:38It's expensive as hell, so I may as well rent it to everybody else. turned into a blockbuster business, but it made his core business better because he could build to Black Friday, and nobody else could because they didn't have AWS. So that's why Elon has launched EWS, Elon Web Services, with his compute, and he signed up a big first customer with Anthropic. Listen, nobody on Earth is better at turning electrons into tokens than Elon. So expect a lot more data centers out of Elon. Expect them on Earth and eventually in space. And I think that changed the whole tenor of the SpaceX IPO, both the cursor and the anthropic deal.

23:17I think that went from people being slightly concerned about it to people being quite excited about it. I'm happy to unpack that. So I think that for Meta, if they're going to be in the game of spending that much money, listen, Susan Lee is incredible over there as the CFO. and I'm sure they're looking at the strategic plan and Mark is saying, I want to build even more because that guy is never going to give up the race, right? To frontier level AI, none of these guys want to give up that race. And so they just have to figure out ways to monetize everything that they're building. Do I worry as a shareholder at some level?

23:56That's hard. That's hard to take a business. It's been 120 % consumer and say, okay, now we're going to be in the business of AWS and maybe even in the business of enterprise-level agents, I think it is hard. I think they're up for the call. And remember, you suggested the merger between product-led growth, these coding agents kind of feel like consumer adoption. So there's a lot of shared consumer DNA with what's going on in the enterprise today. So they may surprise some folks. And Metta does have links into hundreds of thousands of businesses through the ads platform. So it's not like they don't have any relationship to businesses.

24:33They do. One more that I was curious to get your thoughts on. Kirkland and Ellis is talking about investing half a billion dollars into their own software to help run their firm. A lot of people pushing back on that. Historically, you take a firm that doesn't have strong software competency and they spend hundreds of millions of dollars on their own software. There's a lot of examples where that hasn't gone well. Yet at the same time, making software today is wildly different. And it's very possible that things are changing, especially if you can get the right partners around. And I know they have some great partners.

25:14Do you expect more companies of that scale, services, businesses to want to try to own as much of the stack as possible and not be reliant on the Harveys or the Lagoras of the world? I mean, what else are they going to do? I mean, it's kind of like, what else are you going to announce? So just we give up. So like and like they got to do something. The competition is coming straight at them. I don't think it's a high probability bet personally. Like if I was a partner at Kirkland and Ellis and somebody pitched me on that, I'd say, I'm not sure that's the highest and best outcome here. So what is an alternative outcome?

25:48Well, good friend, you know, Josh Kushner, what he's doing at Thrive Holdings, right, where he's buying accounting companies. And now I have somebody who's just like deep in the weeds, recruiting the best engineers in the world, deep partnership with OpenAI. I saw Greg Brockman retweet the great the work that there are that they're benefiting all these accounting firms like they're driving just huge productivity gains in these accounting firms. So it seems to me that that's a more likely outcome. You know, a Thrive Holdings buying a Kirkland and Ellis and saying now we're going to, you know, take this thing and AI turbocharge it.

26:22I think you're going to see a lot of that out of private equity firms, out of firms like Thrive Holdings. I think you're going to see take privates where people do that on an individual company basis. But am I confident that software has gotten so easy that a law firm that gets up every day and thinks about writing legal briefs is all of a sudden going to write killer legal software to compete with OpenAI and Anthropic? I think that's unlikely. What is your thinking around the series A, B, C, these earlier growth rounds? It feels like a lot of investors are just kind of frozen. You were talking earlier about not necessarily frozen in terms of their activity.

27:05They're doing a lot of deals, but they maybe don't have as much confidence knowing what will get steamrolled in the future. You were talking about being in the token flow. Is that like where you feel comfortable deploying at this early stage where you're betting on a 10 year outcome? Yeah, I mean, listen, I think we all have to have the humility in these moments to know that looking out 10 years is almost impossible. Looking out 10 months is pretty damn hard. But I would say if you just looked across our portfolio and I think Altimeter is performing better than it has any time in its 18 year history.