What a Week! Anthropic Opens the Books, Intel Raises More Questions, Marvell and Lumentum??

0:05Ben Bajarin: Hello, everyone. Welcome to another episode of The Circuit. I am Ben Bajarin.

0:12Jay Goldberg: Greetings, programs. I am Jay Goldberg. And you can tell that I am not an AI because I'm very tired and AI does not get tired.

0:23Ben Bajarin: okay what a freaking week um there's so much to talk about warning ahead of time people this is gonna run long we got so much to get into we don't want to jip anybody of the goodies of the good bad ugly i don't think there's any indifferent it's either good bad or ugly There's no nominal. Oh, man. All right. Well, we start the week with, you know, what was somewhat expected in Anthropics S1. And man, did that bring out the Warshak test of your convictions or your opinion on everything that's happening in NAI. We had Fudsters making a big deal about things that weren't a big deal, like missing numbers that are going to get updated before the IPO.

1:19Ben Bajarin: It's like the numbers weren't there because they're like terrible and they're hiding them. It's time to finish the quarter. So need to update the freaking numbers. Like that's just common sense. But then, you know, for others, holy cow, they're spending a bunch of money or holy cow, they're getting so much subsidized compute. That's why their margins are better. anyway lots of reading it was very long the risk statements were exceptionally fun existential risk to humanity in fact i hope i seriously hope when open ai does theirs like they take it to the next level like how do you how do you take that statement to the next level but they should like the risk state risk statement battle who could who could who could make the existential risks higher.

2:06Ben Bajarin: Anthropic or OpenAI? This is a new game.

2:09Jay Goldberg: I will admit that this week I literally wrote the line. Anthropic may develop products which could wipe out all of humanity, which would cause earnings to decline.

2:22Ben Bajarin: You think? You think? We'd all get the needed break we need, you know? On a similar week where like governments are out saying hey we should prepare for a wipe out of the power grid make sure you have food and water for three days to 90 days in a military context oh geez governments all over the world prepare prepare for disaster existential risk to humanity everywhere um okay well not to get too much into your analysis of it but uh jay initiated on Anthropic. Let's just talk sort of high level. Obviously, you know, their revenue continues to rise. I think no one at least should expect, right, triple digit annual growth for three to four years or more.

3:20Ben Bajarin: They are undoubtedly, by a large margin, the most profitable enterprise software company in the time that it took them to get there, like fastest growing enterprise software company in history. They obviously continue to see their demand increase. There was positives. There were certainly some question marks, but let's get into it. What was your read? um so first off i read the whole thing uh cover to cover with my eyeballs i may have skipped some

4:01Jay Goldberg: of the boilerplate securities law language but i read the whole thing um there were parts of it that i absolutely needed claude to explain to me and we'll get into some of those it was a very dense document, but I think like, let's, I think if we just sort of strip aside all of the extreme language, the hyperbole on both positive and negative, I thought that if you had to sum it all up, like what is anthropic? They actually said, anthropic was founded on the empirical conviction that scaling laws are the primary engine of AI progress, which is, you know, like that's very clean language. For an S1, that's very, very clean language, and I thought it was worth pointing out.

4:45Jay Goldberg: They think that building ever bigger LLMs is the way to advance AI. And if you are a company that sells semiconductors, that's very good to hear.

4:59Jay Goldberg: Very good to hear. Right. Bigger models. I don't know quite how they can say empirical conviction. That's a kind of seems not quite linguistically correct, but I'll take it. This is a company that believes fundamentally in AI. They believe a lot of other things, some of which are a little stranger, but they see the future as building bigger and better, or bigger AI systems gets to better AI results.

5:33Jay Goldberg: And then from there, everything gets crazy.

5:36Ben Bajarin: so the other part right again i don't think anybody well sorry i'm not gonna say anybody um undoubtedly the argument continues to remain that uh the demand for compute is high demand for their services are high which you know is is quantifiable um they had some points about their customers and i thought that was important right because in the debate of circularity economy and that everybody's just paying them themselves, right? We, we continue to try to make the point that, you know, look, the long tail of the enterprise is what's, you know, ultimately going to fund this. And so they went out of their way to talk about, you know, the customers that they have in the fortune 500.

6:21Ben Bajarin: And then again, how small of budget they get as a port of that, uh, those operating costs or revenues from those, those enterprise companies really, I think to make the point, which is something that I had said on Twitter and others said as well, um you know we're just still very early in the enterprise adoption cycle so as long as we're early in that that growth profile of as enterprises go and diffuse and scale production ai in their enterprises certainly anthropic and open ai right perhaps others but certainly they are well positioned to get a share of that budget that that is very very large this budget is significantly large.

6:59Ben Bajarin: Um, and so I think that was an interesting point. I think a lot of people took, took away from that. Like, yeah, sure. We're early. We get it right. You're, you're in a part of a growth for AI as a spend of both it budget or as a part of, uh, of revenues from enterprises. Um, that certainly goes up. Right. And so now it's a matter of how do you continue to compete and, and, and create new products that go and compete and, uh, with, with your, you know, with your peers and get that budget or the vast majority of that budget. Um, but I, I thought that was a helpful, you know, sort of framing. Like I said, a lot of people in the bullish camp pointed that out, how early it was, but, but that's a true statement.

7:44Ben Bajarin: Um, and I think it was good that they pointed that out to just show, you know, this is a growth wave and we're early in it and And we expect to get more of that budget over the next couple of years. Right. And I think this goes to what I was saying before, which is if you just sort of strip out the use of the word AI and you look at this strictly as a software company, it is very interesting in not just the sort of top line growth, which is obviously very quick, but also

8:11Jay Goldberg: the way in which they're building up the sort of software ecosystem of partners and distribution and go to market. Right. This is – they've figured out the right growth hacks to get this to grow. And if you look at sort of the penetration of, to your point, of the enterprise and how much enterprises are spending there, it's still a very small number for large enterprises. and it's certainly they have demonstrated at least anecdotally that they have lots of proof points that once one employee starts using it they start evangelizing it to their co-workers and then those co-workers start using it and then everyone starts upgrading they they have figured out that that growth pattern there which is i think very important for the company right that's certainly the for me the headline i think you tweeted this your your your wife had sort of started evangelizing use of claude to her her co-workers or ai to her co-workers and i think i think that's true in a lot of other cases um yep right yep yeah so let

9:17Ben Bajarin: me let me add some helpful just color on this so everybody can kind of level set on on where we're at. We just finished and I published yesterday round two of our CIO CTO survey, which we call the EA index. Obviously there was a whole slew of questions I wanted to get into, like, you know, how far are you out in production? Are you seeing ROI? Because the ROI question is there. What's going on with token dollars? Are you going to spend more? Are you going to spend less open models versus frontier, all of those things. And, and this is interesting because exactly the point that you made about kind of how my wife has viewed this as well as, uh, as, uh, as her peers is like, it wasn't, it wasn't like AI wasn't good or Claude or Anthropic wasn't good for them earlier in the year was that they didn't know how to use it.

10:10Ben Bajarin: They didn't know how to tie it to their workflows and get the most out of it. And it wasn't until I sat down with her and was like, here's how you You can do this for lesson planning. Look, you can create interactive games. Those interactive games, like as kids play on their computers, can actually track their progress. This gives you a way to like track them over time. Like these are all things that most people just don't know. In fact, and you have this conversation. We had some qualitative conversations with a host of these enterprises we talked to. Some who were like bleeding edge. You've got all these different groups who are using it to the max.

10:46Ben Bajarin: And then you have others who are just like, I don't know what to do. Like I'm not that far. And it's, again, it's not a, not that it's capable. It is a, it is a, a, a education or a skillset, a skill gap within AI. And so that has to close like, like whether that's like we talked about with Benedict, whether that's UI or others, but the other part that to me was fascinating and I, I get this, I guess I also don't get it, But like, all right, so top level of our survey was only 6 % of CIOs, over 200 we surveyed, are seeing a return on investment. Now, at a top line, you're like, that's terrible.

11:26Ben Bajarin: Like, dude, 6%, that's awful. However, the vast majority aren't even tracking ROI. It's not because they're not getting it. It's because they don't know. And so you're like, okay, well, first of all, you all need to figure out how to get some tracking in place. so that that can justify your spend. But the picture gets very good of the percent, the 33 of 200 that were actually tracking it. 67 % saw distinct ROI. And that distinct ROI in that decision led them to have more IT budget or more budget to AI because they saw it. And the other important part of this, which I think is probably the big nugget of insight from the survey, was ROI scales goes up as production scales.

12:13Ben Bajarin: So the more places that you scale AI, the more you see ROI. And so if it's just one BU, you see it. You bring it to two BUs or three BUs, you see more. And so it compounds as it diffuses in the enterprise. And so that was clear as day. Everybody who was tracking it directly saw line of sight to ROI with scaled production across the enterprise. Now, again, logical, I get it, right? You're maximizing, you're compounding your productivity gains, your cost gains, whatever those are, the more it goes into your business. But people, the vast majority of enterprises just don't know this yet. And that to me, I think is an interesting part.

12:52Ben Bajarin: Now, the evidence for that, this point that I'm making, and this was super interesting, was that we also discovered that there are a lot of companies who the BUs themselves are funding AI. That's not a part of IT budget. That is the BU saying, this is great. This is amazing. This is helping my people. Everybody in my department's coming here saying, I need more AI. And so the BUs are putting that as a line item. And that to me was super interesting because that's not necessarily going to show up in an IT budget, that BU's themselves. Now, again, someday it's probably going to have to. I would argue like you probably need to make sure you're using approved models and processes with your CIO, CTO, and CSO.

13:33Ben Bajarin: And so that should get rolled in. But the fact that BU's might contribute revenue to the overall growth of this, not just an IT spend that every employee gets, is actually very interesting. And to some degree, to just use a very different analogy here, there are enterprises who, as a part of their hardware program, have employees who want Macs and IT says no. And the BU says, we'll help fund those Macs. and this is not an uncommon thing, but it's also the kind of thing that is shadow AI turning into official AI as a part of BU's. And I think that's very high signal, super interesting, almost impossible to track.

14:19Ben Bajarin: I'm gonna tell you that right off the bat. But the fact that that's happening in all these cases that we track shows you there's something there. Again, how much I get the timeline of this, we don't know, but I walk away. All of this to say, I walked away from the second version of this survey. I was pretty confident in this version one that there is a ton of ROI. They're willing to spend on that. We just have to get over this hump of education and scaling it to every department and what does governed production look like and how do you put security controls and all that. We need to get over that.

14:55Ben Bajarin: Once this happens, once that happens, man, it's slowly then suddenly that IT budget ramps here

15:05Jay Goldberg: I buy that I think they actually talk about shadow IT in the S1 somewhere where they talk about adoption matters it's a real thing and I think what you say is fascinating because typically we think of shadow IT as just being the lone individual contributor using his corporate card to sneak in 50 bucks of AWS expense.

15:30Ben Bajarin: Right.

15:31Jay Goldberg: Right.

15:32Ben Bajarin: And a personal card for that personal card.

15:35Jay Goldberg: And that's, I'm sure that's taking place too. Yes. I'm correct. I don't want to rat anybody out as well.

15:42Ben Bajarin: I would do this if I was at an enterprise and they were like, Hey, you can't have it. I'm like, screw you. I'm gonna pay for it myself.

15:49Jay Goldberg: No comment.

15:54Ben Bajarin: I am my own. decision maker so that's all fine but you see what i'm saying what remains yeah i i think it is

16:04Jay Goldberg: for for people it is it is a little tricky to get it started and then you once you figure it out and you realize it's really not that hard to get started it is it can be very productive and i think that speaks to what i what i call the growth engine inside of anthropic they figured out how to do that and in part because it's just so simple to use

16:28Ben Bajarin: yes yes anyway so i'll all of that to say directionally i'm with the trend timing right tricky again a lot of this is dependent upon enterprise scale of ai everybody like our infrastructure the hyperscaler conversations that we're going to have in a bit this is all related to when enterprises scale, which is why, as I've said many times on this podcast, we are laser focused on studying the enterprise on this adoption cycle, because that will dictate all of this going forward. Um, but like I said, I walked away, encouraged that, that there are very positive signs for this. We just need more enterprises to start seeing those returns, track those returns scale within their enterprise and i i like i said i did i think it will become a more sudden inflection point this is again just my opinion but i think it will be a more sudden inflection point that we probably won't see coming early enough and it's going to inflect pretty pretty crazily yep i think yeah i think so and i think that's an important part of what's

17:41Jay Goldberg: taking place at Anthropic. But let's move on because there's a lot of other good stuff in here that I think bears... All right, let's move on.

17:48Ben Bajarin: Oh, actually, sorry.

17:50Jay Goldberg: Let me just close on that. One thing I did. There's a lot of dogfooding taking place at Anthropic. We kind of all knew this. They're using their own product to encourage their own product.

17:58Ben Bajarin: Yes.

17:59Jay Goldberg: But they said that 90 % of code contributions now are written by Claude. 90 % of the work that Anthropic is doing is being done by Claude. So when we get to 100%, that's recursive self-improvement and you know big things happen anyway yep um and again i think we should assume

18:20Ben Bajarin: this is just the same like a lot i would be shocked if there's not that much difference between the underlying meat of what we read between anything open ai puts out and what anthropic i think these are very similar businesses in their shape their function their usage etc so i i kind of feel like they're going to be similar. Maybe I'm wrong. I don't know, but I feel like they are.

18:43Jay Goldberg: Yeah. I mean, we don't have timing on the OpenAI IPO. It's not this year. So it will be very, it'll be, it was a sleepless night for me this week, sleepless week for me this week, reading through that S1. I'm going to have another sleepless week when that S1 drops. But I think, returning to the fact that we're a podcast about semiconductors, I think there was a lot of interesting stuff in here about their approach to semis. I think the big sort of question around Anthropic now is one of the things that stood out was the fact that they have been incredibly capital efficient. They haven't raised that much money given how fast they've grown because they've been using cloud, right?

19:33Jay Goldberg: All of their training basically was done in the cloud, starting with Amazon. they're changing that now. They've realized that they can no longer rely on third parties. They can't be cloud customers. They have to now start directly controlling their data centers. And they have this project in place called Anthropic Direct, where they will begin signing long-term lease agreements and various forms of controlling, not quite owning, or controlling their own data centers. And this is a big deal because they're going to go from a software, their capital light business model to now a very capital intensive business model.

20:11Jay Goldberg: And again, for semiconductors, that's good news because they talk a lot about what their multi-chip strategy is, right? They use NVIDIA. They use Amazon Tranium. They use TPU. They use a lot of AMD. And they use – they're now designing their own chip with Broadcom. So they're – what's that, five? Yeah, five chips they're using. and I thought that was that was pretty cool but I noticed in the language this this is the level of pedantry I was reduced to this week they talk about this multi-chip strategy and they describe their relationship with each of their chip vendors and it's all slightly different right there's a there's an awful lot on Broadcom in there because Broadcom is funding the development of their chip the build-out of that chip when it's, that's a whole other, that's dozens of pages.

21:03Jay Goldberg: But looking at like NVIDIA, Tranium, TPU, and AMD, they describe those relationships very, very differently. And it caught my eye, right? They say that NVIDIA and AMD both offer the opportunity to collaborate. But for NVIDIA, it's the opportunity to collaborate on design and engineering to optimize future NVIDIA hardware for our workloads. And for AMD, it says collaborate directly with AMD through a multi-year engineering collaboration. So on one side, they have a relationship with NVIDIA where they can sort of like optimize future NVIDIA chips. And what I read that is optimizing probably means extra, you know, sort of custom software tools, maybe some custom CUDA kernels something like that as opposed to AMT where they have this multi-year engineering collaboration and then for Tranium they have the opportunity to influence future generations of Tranium and Google is just there's no collaboration going on and so this is something I'm going to be watching is like who is really doing what for Anthropic it's all a little bit different what level of customization are they getting from these chip vendors it's clear it's different like it's just the language is super vague but it's clear that they have different they're getting different amount of love from the different chip vendors

22:30Ben Bajarin: yeah yeah which you know again this is not uncommon right just back to server cpu days both intel and amd would do custom skews ish of server cpus for the hyperscalers if they wanted it throttled up one way or another or lower energy etc they would do that um same design right little different performance profile. What I think was interesting though, is that that is a hundred percent, this broad point, exactly the point with the article I did on everybody wants the workload to be fungible, right? So the future of AI is fungibility that you have your workload and you can move it across diverse bits of silicon, all with different perhaps performance profiles, economics profiles, and your master orchestrator decides where that goes for your bottom line.

23:18Ben Bajarin: They're probably the best example of this. I'm not sure OpenAI or anyone else has that level of diversity across compute infrastructure with the same workload. But that, again, that shows you the fungibility. Now, to your data center point, this is why Meta has always done what they did, right? They've believed that owning data centers, while cost expensive, gives them economic benefits. That's the point of their whole blog they put out with NVIDIA on Prometheus, is that owning that, owning that compute and that Tranium lets them tune and fine tune things for different economic profiles based on different silicon, train models faster, release products faster, all those things.

23:56Ben Bajarin: So it makes sense. Both OpenAI and Anthropoc are going to do this. They just, they'll never satisfy their own compute with their own data centers. They have to outsource, but they're going to get better margin profiles on that, probably fill it with some of their compute, right? Harden silicon to their models. That makes sense. Um, I, again, I'm going to keep beating this horn as we have last week and vampires, cybersecurity is going to big deal. They're going to need to build their own cybersecurity models. They might run that on their own cybersecurity ASICs. I don't know. Like this is all feasible.

24:26Ben Bajarin: So sure. Being vertical there makes a ton of sense.

24:29Jay Goldberg: I agree. But this is, this is a pretty radical shift for the industry because in, in, you know, back in the stone age of CPU days, when all we cared about was CPUs, you didn't bother doing this. You didn't bother. I mean, yeah, you get a little tweak here and there from Intel. You're right.

24:46Ben Bajarin: You were happy using your hyperscaler partner or whatever.

24:49Jay Goldberg: Yeah, you just use whatever. And here you have the big compute players have gotten so deep into it that they're doing their own, and they're also working with almost literally every vendor out there. I think OpenAI actually has one. I have a list, and OpenAI has one more partner than Anthropic does, but they both have six or seven each and right they wouldn't have they wouldn't have done this in cpu times this is this would have been just one one vendor and one backup and now they're just really though does doesn't this just make the case that not necessarily that gpus i i hate to say this

25:30Ben Bajarin: broadly but not that gpus are necessarily appreciating assets but that owning that owning that, owning your accelerator, the thing that computes the most computationally complex workload in software the industry's ever seen is a strategic advantage. Like that, that has to be the end, the end point here. I, I, I think it's hard for us to tell because the demand has come on so strong and so suddenly that we're, everyone's playing catch up.

26:02Jay Goldberg: and I don't know that what we see today is necessarily the pattern going to be in the future.

26:10Jay Goldberg: It's just like everybody needs everything they can right now because growth is, you know, 1 ,000 % a year, 2 ,000 % a year. When that slows down, when everybody in the world has AI in their pockets or wherever, in their eyeballs, how does that compute actually sort out? And I think it will, I don't think we know. I think it will depend a lot. Certainly, if you are like Anthropic, you have a business that's premised on operating at or beyond the frontier of AI capabilities that sort of lends itself very, very well to having your own silicon.

26:54Ben Bajarin: Sure, sure. But am I wrong in thinking, and I can cert this is certainly I think undeniably true for the next four or five years but like is it perhaps out of the realm to think that like nobody will be able to just fully have their own capacity like for all their compute needs like I don't see how you can't it's inevitable that you spread this out I don't think we get to a spot where anybody's big enough that they've got 100 % of their capacity anytime soon, including, so you have to pick, my point here is if that's true, you, the hyperscaler, or you, the lab, have to pick the most important workloads that you want to run on your data centers and your silicon.

27:44Ben Bajarin: You can't satisfy all of it, so you have to pick and make targeted decisions at which that is. Right now, absolutely.

27:54Jay Goldberg: Five years from now? I don't know. Maybe. But right now it's like, you know, what's that old saying? In a hurricane, even turkeys can fly. People are going to try everything right now because they just – they need anything they can get. Where does that settle out? Steady state is less clear to me. I think – Yeah, but they've recognized – I think it's very likely that it remains very fragmented and it gets more fragmented.

28:18Ben Bajarin: Agree. I think that's a – but again, my point is even – it's an affirmation that you need to have land power shell because economics necessitate it. Great, but you can't satisfy all of it. And then B, that you want to have your own compute, which will include networking, like all that stuff, right? You're going to probably still be as vertical as possible. Harken back to props to ourselves. Very early on, maybe the fourth podcast we ever did was on why do companies want to go vertical? And we talked about Apple and we made the case that like vertical integration is the best strategic advantage that anybody has.

28:59Ben Bajarin: And it's why people should go and do it. And again, Apple, Apple's approach to this, as we talked about was they only do custom silicon where it's a valued workload, a workload that to them is a differentiator. Everybody here, I think applies that same lens and you just have to decide land, power, shell, what your infrastructure is, what workloads you're going to run there. but it's an affirmation that there is strategic value in something there.

29:27Jay Goldberg: Yes, but I see it flipped around, which is you only should do your own silicon if you can generate some form of strategic advantage from that. And that's not true in all cases. I think it is true for the frontier labs. It's absolutely true, but you have to be able to generate – you don't just do it to save money. You don't just do custom silicon to save money. You do it because it gives you some strategic advantage that gives you an advantage over the competition.

30:04Agreed.

30:04Ben Bajarin: Agreed. Now, again, I'm not going to say we know what that is, but this to me is the lens they're using for that analysis. We should control soup to nuts, top to bottom, some part of this.

30:19Jay Goldberg: But I mean that's the interesting thing is that Anthropic has gotten as far as it has now without any of that. They use NVIDIA. They use Tranium because that was what was available to them, and they didn't even own it. Now they're going to own it because the market is so tight. But they've come an awfully long way without any of that. yeah yeah agreed anyway i'll tell you where this leads me is um like if you think about anthropic like what is it is it it's not an internet company like it's available on the internet but it's not an internet company it's kind of a software company but we typically now we you know for years we've learned to think of software companies as as sass companies that are asset light.

31:10Jay Goldberg: This is a company that is very R &D dependent and has now gotten to a place where it is very capital intensive too. And so, you know, we're always searching for comparisons or analogies for AI. To me, this looks a lot like a leading edge foundry, right? Where you have to do intensive of R &D, and then you have to deploy an immense amount of capital in order to monetize that. I mean, that's TSMC, right? We're going to spend$50 billion a year on CapEx, and we're going to have 3 ,000 PhDs working for us, and that's how we stay ahead.

31:50Ben Bajarin: You're right. No, you're absolutely right. That is all true. It's just a super interesting dynamic, and you're right. It's a big change. And it is this thing that we're talking about that is driving the concerns in the industry that we see. People are just like, they get it, but they've not had to like wrestle with what does it mean to kind of own that level of infrastructure for your differentiation so that it's not, you know, you're not, you are not a commodity. You don't become commoditized. You have sustained strategic advantage. these are the things that now enter the equation and then whoever you think has the best of that is perhaps better set for returns right so anyway yeah i mean and i think that's that's the thing

32:39Jay Goldberg: that gives people pause here is this is going to cost a lot of money right one of the key things they left blank in in the preliminary s1 was the amount of purchase commitments they've made for for silicon and the reason they left it blank is because the ultimate value of those depends on their stock price right so when you file an s1 you leave the stock price blank until the very last minute because because it's being negotiated right and so if you have anything in the s1 where it the the number depends on the stock price you don't fill it in until you know what the stock price the offering price is going to be and so that includes all their purchase commitments with companies like broadcom and whoever because some of that is is valued and they're paying for some of that with stock and whatever that number is it's massive right i i sort of tallied it up i came up with like 800 billion it's probably the high end of the range it's somewhere between five and 800 billion dollars in purchase commitments over the next it's basically the next five years and those are big numbers and that kind of has people freaked out and it's going to change a lot of the things like a lot of their numbers because just to be clear, they were actually profitable in Q2.

33:50Jay Goldberg: They're cash flow generative and profitable. And now that's all going to change because they have to spend a trillion dollars on compute.

33:57Ben Bajarin: But did you not think, I saw this come up and you read it, but you didn't think that some of that was because they were getting some subsidized infrastructure from their partners? Like they weren't, are they paying traditional market rates? Are they profitable paying traditional market tokens, I guess is my question.

34:14Jay Goldberg: I think they are getting lower rates because they're buying in volume right they're they're like i mean they're they're they are probably aws's not probably they are aws's largest ai customer by yeah i would say that's true by a very large amount um and so yeah they they get a they they merit a volume discount on that alone and did amazon give them special terms because the equity probably that too so you know like i've done a lot of math on trying to figure out compute costs and every every calculation i get i know it's a little bit too high because open ai and anthropic are paying less than market rate right often by you know 50 less so yes it's subsidized to some degree so okay but but but to me am i wrong in

35:01Ben Bajarin: this view that that needs to continue in some degree the deals that they get with their infrastructure partners and i get this is win-win this is win-win for amazon this is win-win for because as we'll talk about in the hyperscalers for a bit, they sort of alluded to this, that these big customers, despite having some discounts, their margins are, margins meaning Amazon, their margins are still good. But part of that is why we enjoy some subsidized token prices in our$200 prices. It's all you can eat.

35:32Jay Goldberg: Yeah, that's the Uber argument, right? Like in the early days of Uber, everything was very cheap. It was all subsidized by venture dollars. I don't know how true that is. I mean, like, I mean, yes, yes. I mean, their margins are very high, right? They're probably 70%, 80 % gross margins. Again, it's not totally clear from the numbers.

35:52Ben Bajarin: No, they're definitely that high, if not higher. But yes, I'm with you.

35:57Jay Goldberg: So that to me doesn't sound like a company that needs subsidies. um will like once these guys get to steady state and are profitable you know whatever 2029 or 2030 whenever they get to like sustainable profitability will they raise rates okay yeah maybe

36:15Ben Bajarin: yeah but all right no that was that was what i wanted that was a good answer um so use use your cheap tokens while you can people okay let's we could talk about this all day let's move let's move to hyperscaler earnings all three happen this before before we do i have a few quotes that i think are just precious right okay let's see wait number one is they say model architecture

36:38Jay Goldberg: decisions are made with inference economics as a priority which goes to the point we were just

36:43Ben Bajarin: talking about right it's just like they admit it yep yep in discussing how they go to market

36:51Jay Goldberg: um they they distribute their everybody and what they say is our relationships with these these CSPs, the hyperscalers, are multifaceted and complex.

37:02Ben Bajarin: I did read that one. That was fantastic.

37:04Jay Goldberg: That's like the understatement of the year. Your biggest supplier is also your potential biggest competitor. Okay. Hold on. Hold on to that line because I want everyone to think about that line

37:16Ben Bajarin: when we talk about some folks' earnings in a bit. That line is the exact same. I should say multifaceted. A supply chain is multifaceted and complex.

37:26Jay Goldberg: Yep. That's a good one. Another one, I think I just have to touch on this, is their governance structure. Okay.

37:35Ben Bajarin: Yes.

37:35Jay Goldberg: All right. Their governance structure, how they're voting different classes of stock. It's like five pages in the S1, and it took me two hours to read it. And absolutely, I had to throw it into Claude repeatedly to explain it to me because it is so complicated and so absurd and so cringy. They have five classes of stock. One of them is going to go away. So they're going to have four. They have four classes of stocks with different voting rights. I could talk about this at length, but like the simple summary is the founders are in control. That's that's pretty much all of it. But, oh, it is so, so much more complicated than that.

38:11Jay Goldberg: And it's very clear that they wrote this with the experience that they all went through leaving OpenAI and that whole turmoil around the coup. they they're clearly wrote this put the structure in place as a reaction to like the experience they had at open ai and it it gives these the seven co-founders effective control and i think okay that's that's fine like mark has that control the founders at google have something like that level of control what i don't think they've thought through is like all the unintended consequences that are going to ensue from that, you have seven people. It's not one person.

38:49Jay Goldberg: It's seven people, and they kind of have to vote in a block. They vote in a block, and how they figure that out, I just think it is a recipe for drama for years, and we will come back to that. Right? I'm so excited about this.

39:05Ben Bajarin: A recipe for drama.

39:07Jay Goldberg: Yeah. And part of what's going on is that they want to have an ethics board. I get it. I get it. Right. The long term benefit beneficial trust, which is this sort of a super board that is comprised of experts from other fields who are supposed to be sort of the moral compass to make sure the company adheres to its principles. Right. And and so repeatedly through the S1 warns people that that the pecuniary interest of shareholders is not the priority. And I love the fact that they use the word pecuniary repeatedly because like what it's basically saying is the company purpose, its goal to benefit humanity, whatever that means, may take priority over shareholder interest, which is sounds noble in spirit.

39:58But in practice, I don't think it may play out quite as neatly as that.

40:05Jay Goldberg: Last one. Last one. This is my conspiracy theory. I'm kind of very curious about this. Think back to the history of Anthropic. We all know its origin story as it came out of this team tried to remove Sam Altman as CEO of OpenAI. They failed at that, and then they left, and they founded Anthropic as a competitor. That's the story we all know, right? But if you think about that, that took place in 2023, that whole drama. they actually founded Amthropic two years before that in 2021 right and I was like wait that's before all that happened so I think that means they were planning it ahead of time and so I guess there's already a movie being made about this story but still if there's ever a movie made about it like the real story is like these guys were planning this two years in advance and they knew that they might lose and so they had a backup plan oh my gosh okay i could go on for days about all this stuff but that's that's the main thing

41:14Ben Bajarin: hey well hey look they're gonna ipo we're gonna get to talk about that stuff will get updated so we'll do that all right let's let's move on to the hyper scalers um next bag next bag despite Despite everybody continuing to say that they've got an absurd amount of compute, the AI demand is there, there's other things going on under the scenes in either CapEx or revenues or whatnot. So, you know, sort of like Microsoft, great. Google, Amazon, questionable for other things. Amazon's got more business than AI infrastructure. And so they had to talk a lot about other things than just AI demand. um microsoft right no secrets in pc industry being terrible was going on to windows everybody wanted to talk about azure all the cloud growth was there but i guess people wanted more and wanted more clarity on kind of the ai revenue side um there was some questions on capex guides where again they were like well we're going to raise them we're just not telling you all of it now um so if we could just maybe go one by one i don't know or you want to bulk them all together

42:30Jay Goldberg: let's let's let's talk hyperscalers so so i think there's two two things we have to talk about the hyperscalers i think we just bulk them all together because they've all gotten blurred in my head at this point all right all right number one is they started the week with everybody raising money both meta had an equity offering amazon had a debt offering both in 70 80 billion I don't know much, but big, big capital raises from both companies to fund data center expansion. That goes along with lots of companies doing that earlier in the year. We also had Oracle, who's kind of, maybe sort of a hyperscaler in this context, had their analyst day.

43:09Jay Goldberg: And they actually said that they were not going to do any capital raises for the foreseeable future. Like not never. They don't need to. They don't need to. And it was interesting because all of that was pretty well received, and that was on Monday. Just remember Monday morning where, like, before 7 a.m., we'd already had five major news stories, including S1's Anthropics S1. Yeah, so all of that was pretty well received, right? Yes, these companies are doing big capital raises, but the markets was like, okay, that's fine. They kind of looked through it. Then we get through the week and we have meta earnings, Amazon earnings, Google earnings.

43:48Jay Goldberg: I think meta's earnings were fine. They were able to talk a lot about the engagement that's being generated by their AI agent Muse. And I think their stock was off afterwards, but it wasn't off by a lot. People were just like, whatever they had talked about was good enough. It wasn't a big concern. Then we had Google earnings, which were not okay.

44:16Jay Goldberg: Like, they just weren't seeing a lot of growth. Yeah. And then the stock was off pretty heavily.

44:23Ben Bajarin: Yeah.

44:24Jay Goldberg: And then Amazon, we're forgetting Amazon. Amazon was in there too. Very similar story. People weren't so excited with their numbers. But I forget all the details.

44:35Ben Bajarin: Yeah. I mean, I think, again, it came down to a lot of other pressure. There wasn't as much guides on the go forward. You know, everybody had growth in the cloud business. Backlog, you know, to some degree was, I think, lower than some people had thought if you're just tracking backlog growth. Obviously, they wanted to see continued CapEx go higher, which is sort of what I heard. We thought they were going to go. They're going to be willing to spend more on infrastructure. sure, you know, but, but their calls, like just strip away the other parts of the business. They had to talk to you. Like Google was like, Oh, you know, search is okay at a time when I think people are really freaked out about what happens to Google search.

45:11Ben Bajarin: Right. Um, it's, people forget Google search is the largest part of their business. So if that starts to hurt, earnings are going to start to hurt despite what happens in Google cloud. Um, so I think there's, that's, that's what, again, why I say there's, there was more in their businesses that they had to talk to, then just, if you just isolate it, and this is going to be true of a number of people we talked about on this particular podcast today, if you just isolate it to the data center or the computer, the AI side, it looks okay. When you look at the other side of their business, which might very well be impacted by the success of other people's AI business, AKA Google search, and not showing up when you use agents to search.

45:53Ben Bajarin: Um, that's a fair question. All right. On their revenues, on their growth trajectory. And so it's, it's, it's, it's positive, but also then to some degree negative. If some people's businesses are, or parts of their business are up for disruption and the other one's not going to be big enough to offset it for a really long time.

46:10Jay Goldberg: Yeah. And I think the hyperscalers got themselves in this bind because earlier in the year, they started to get questions about ROI, their return on their AI investments. And they all came back and said, well, not all, but a lot of them came back and said, oh, look, our AI business in the cloud is growing really, really well. And now we're at the point where investors are asking for more than that. They're like, no, no, no, that's not enough. And to your point, what you're saying is, what about the rest of the business? Aren't you seeing returns from this? And part and parcel with that is this sort of growing realization that a lot of AI companies have compute, and they're like, okay, we don't have a business model, but we're just going to resell this compute to somebody else.

46:50Jay Goldberg: Elon has talked about this Elon's done a lot of this but there are lots of startups coming out this week saying hey we're pivoting we're going to just resell the compute that we locked down and ultimately that leads to the question well if you don't need it for your AI magic model who does need that ultimately who is buying all this AI compute is it just OpenAI and Anthropoc are the only ones going to be buying AI compute forever that doesn't seem sustainable or healthy and i think that that's kind of what's what's going on now is like what is your actually what is your core business is it benefiting from it yep right yep yep yeah so okay so this is this is kind of then what i wanted to talk about because while google and microsoft talked about

47:37Ben Bajarin: this like despite aws's stock like the andy jesse hammered this point home right off the bat he talked about the flywheel and, you know, and really like we have analyzed this, right. That all three of them, it has to be a flywheel. Like, so, so meaning that parts of your bit met is the same in the same boat, right. That parts of your business in this infrastructure need to diffuse and benefit and lift all the parts of your business. Right. So for Google, it's search, it's everything related to that. It's gotta be YouTube, like all these things, the flywheel of the investment in AI has to A, cover itself or make money from your general purpose, your public cloud partners, but it also has to be a flywheel for your products in growing revenue.

48:22And so I guess the question is, and you might just tell me all three is the answer, but this is what I've been noodling on, is who, for which of those three names,

48:35Ben Bajarin: for Google, Amazon, or Microsoft depends on the flywheel working the most?

48:42Jay Goldberg: So the way I think about it is Google is, one, I think some of the founders there are true believers in AGI and are willing to spend to get there. And so they'll keep going regardless because they have founder voting rights. and does it help their business? I think there is, just from the outside, it would seem to me that AI could greatly help their business somehow matching ads. It's a possible threat if people sort of use AI instead of search. But that seems like something like they have a good, they have pretty good models and they have a pretty good understanding of how the underworkings of ads work, that they should be okay and they should be able to navigate that.

49:37Jay Goldberg: It's Google, it's complicated, but I think they can get that right. For Amazon and Microsoft, I think it's much trickier, right? It's much trickier. I don't know that they can get the... What they really need to see is... What they need both is to see the enterprise adoption of AI grow sharply fast. But I don't know that they can capture that because they're so dependent on Anthropic and open AI for the models.

50:08Ben Bajarin: Yep. Agreed. So, yeah. So, so what, what you're getting at is sort of what I was getting at is, you know, who, who needs more help from the outside? And yes, you're right. I think Amazon is a, is a big part of that. I would agree with that. And then Microsoft the same way, right? It's got to work for Office 365 and all of their services products, has to diffuse from Azure in the back end and convert enterprise into those two things. Like they're required, whereas you're right, Google has this big business that can convert to kind of like Meta. My only concern for them is it's the customer for what they're dependent on is the consumer.

50:53Ben Bajarin: Whereas the customer that Microsoft and Amazon are more dependent on is largely the enterprise. And I don't know how I feel about, you know, because search. Search is mostly revenue from that is consumers globally searching, whatever it is, 50 or 60 queries a day. you know, the backend is office, right? Or infrastructure to some degree, Amazon Prime commerce. Yes. Consumer, but that feels pretty insulated. I'm just not sure how I feel about Google and the consumer side of this. I'm very confident in enterprise monetization. I'm not so sure how that looks in consumer.

51:33Jay Goldberg: So, yeah, I mean, you and I have different views on this. I think the thing they remember for Google is that consumers are not their customers, right? We're the, we're the raw meat. We're the inputs.

51:47Ben Bajarin: We're the ones seeing the ads, right?

51:48Jay Goldberg: But we still have to see ads though. So yeah. So, so yeah, we still have to see ads. I, I, um, I know there's a lot of people saying that, you know, open as an ad product and people are just going to use Claude and search. Correct.

52:04Ben Bajarin: Yeah. I think if Google, I think Google can navigate that. Right.

52:09Jay Goldberg: I think that they can just need they need to sort of buckle down and really tighten up what their offering is.

52:17Jay Goldberg: Because if they could if they use AI to have better search, that should protect them. I think the problem right now is that OpenAI and Anthropic have a search product just their AI which feels better than Google because they're not under pressure to monetize it and you get a Google, you do a Google search and there's a lot of spam in there there's a lot of AI, there's a lot of ads and so I can just go to Anthropic and get a clearer answer but I think Google can navigate that and start, it's a question of just improving the quality of their search product. It's not an existential thing. They just need to do a better job of something they've been doing for a long time.

53:01Jay Goldberg: But it is absolutely a risk. It is absolutely a risk. So, you know, right. And I think that's one of the big questions around whether or not OpenAI can actually do ads. Anthropic's not doing ads. OpenAI is trying to, And, you know, will OpenAI search, will ChatGPT search be as useful if it's as heavily ad-loaded as Google isn't? Sure. Right.

53:26Ben Bajarin: Well, that's why I like this conversation because their businesses, I mean, Amazon and Microsoft, their businesses are all very different, right? They each have a little bit, sorry, Amazon and Google each have a mix of enterprise and consumer. Microsoft's pretty much in that enterprise camp largely. But this is an interesting tension because like I said, they all have to have a flywheel. And so it's which parts of their flywheel have the dependencies that we believe can convert on the back end of AI. And I think that's an interesting tension.

54:03Jay Goldberg: Yeah, I think they're all exposed is where I come down to it. On the consumer side, you're right. Google is very exposed. On the enterprise side, I think both Amazon and Microsoft have something to worry about in that how much of enterprise workloads are going to be driven by their AI decision first. And then they'll say, oh, well, I can get a lot of my AI directly from Anthropic, and I'll just figure out a way to integrate that into all the back end I run on AWS. and that suddenly the AWS side of it isn't as important. I think that's the risk there.

54:36Ben Bajarin: All right. Let's move to, I guess, what has dominated the conversation really since yesterday and today as we're recording this again on Friday, October 30th. So you will all hear it then. But you'll all know what I'm talking about, which was Intel. So, okay. I want to come at this a couple ways. First.

54:59Jay Goldberg: Wait, wait. Let me give the headline. Intel reported yesterday they had a very strong Q3 and then a very weak Q4 guidance. Go. Okay.

55:12Ben Bajarin: I have deja vu, Jay. This is the second time pretty much this exact thing has happened in the same quarter two years ago. It was the end of Pat's, I don't even want to say tenure, five year, four year. Everybody was, you included, Jay has been our permable on Intel. Everybody who remembers, going back to the earliest of days, Jay was starting to turn. Stuff was looking good. And they just, they just pooped the bed. And while the quarter wasn't horrible, there was a whole slew of execution questions that then came up. on the back of that. And then Pat lost his job. And I'm not saying Libu is going to lose his job.

55:59I will say, however, every question I've got,

56:02Ben Bajarin: you and I have talked about this. I'm sure you're getting them has now come back to what happened with the execution. It was looking good. And now you can only explain this largely, and we're going to get into it from some lack of planning or execution. so okay okay you tell me where you want to start let's just dig through it so so i i look at this

56:30Jay Goldberg: as the basic premise is they have a limited amount of capacity for reasons that aren't current management's fault but they have a limited amount of capacity how do they allocate that capacity do they well what they've done is they've produced more units for pcs which is going through

56:53Ben Bajarin: the worst downturn in 15 years you tell me or hold on hold on i'll tell you one second it uh the worst it's ever been off an annual is negative 16 which is 2022 this is ben's pc model uh we're tracking to negative 14 for this year so the worst since 2022 okay i think it's i think it's

57:17Jay Goldberg: worse than that it's but i think it's gonna be end up because they've they talked about negative 20 that was for the quarter not the year annualized that was it was negative 20 in the quarter the

57:28Ben Bajarin: first first half of the year was actually okay for pcs so it's it's gonna be somewhere around 12 to

57:33Jay Goldberg: 14 i'm pretty sure by year end so they're making more chips for for pcs even the pcs is going through an awful market and they're not making enough chips for ai servers which is going through the greatest market of all time of all time right literally and quite literally and i think what what has thrown people was they warned about capacity constraints two quarters ago and last quarter it sounded good like oh they've they've they're and two quarters ago they said they would work through it during the year last quarter they seemed to make some progress on it and by the way this is exact same setup as two years ago.

58:12Jay Goldberg: Warning, good quarter. I think I actually wrote a note back then before I was publishing professionally. I wrote a note saying, hey, Intel's turned the corner.

58:25Jay Goldberg: Bad warning, a good quarter, and then a really bad quarter. Exact same setup. And then listening to them talk about it on the call and afterwards, it just kept getting further and further away. Like on the call, they said next year will be a growth year, but it'll be back half loaded, meaning it'll come in the second half. And you're like, that's a long way away. Two quarters ago, you said this year is going to be. And so they are currently suffering what I would describe as a crisis of confidence among investors who are just like.

58:57Ben Bajarin: Yeah, that's fair. And I'll tell you, almost every conversation I've had with people in the last 12 hours since the earnings was, oh, is this the old Intel?

59:08Jay Goldberg: I mean, everybody's saying the same thing. Are we really doing this again?

59:15Jay Goldberg: And I would say, you know, Lipu did not sound great on the call. And my take is he was as shocked by this as we are. and I think this is his very rude introduction to Intel corporate culture and like how much you know when did he realize how bad this was what are they telling him internally those are the questions I'm asking I kind of I'm willing to have a lot of faith in him that he knows better than to sort of throw miss miss step people this way and I just so I'm wondering now like what's the Intel culture like internally are they just feeding him good news and hiding the bad news from him

1:00:02Ben Bajarin: yeah okay all right so let's uh let's unpack the pc problem this has been everybody knew this was coming i think the degree of how bad was perhaps not entirely obvious to everyone even though i've been telling everyone who listens this year is going to be worse than you expected every quarter of the like hour think it's going to be like it literally went through this i can just backtrack because i can remember my brain because i had these arguments with and with those who track this in the supply chain versus our our data it was like it's going to be eight percent for the year this was first quarter i'm like nope it's gonna be worse then it goes on it's gonna be like nine second quarter it's been nine percent for the year it's gonna be worse come third quarter it's like a 10 it's gonna be worse it's like it just kept getting worse and, and no one wanted to acknowledge how, how bad that was.

1:00:55Ben Bajarin: And again, to the degree that they needed to do what you and I talked about, I wrote a whole note on how much the PC downturn can lead to in server wafers. They needed to make that call six months ago. It seems like it's just happened. And then it's like, all right, well, how long is that going to take if you're just now starting to think about allocation and then clearly on the call they were like well but you know we got another pc product next year we think it's going to be super competitive called nova lake and so i'm like please don't double down on this because i i almost want to say stop freaking making pc chips and just go to but but i know that's unrealistic i know amd is also not going to do the same thing and and whatnot but but like just make more server CPUs.

1:01:45Ben Bajarin: So now it's like, when can these decisions that happened late enter the market? And then again, to show to what degree is this not bad enough or not? Did they not, are they too late? Right. For, and, but, but then I want to go back to the other point. My other frustration is exactly what we're talking about now, what you just pointed out in the earnings, which was like, oh, it's the, the, the turnaround is farther than we thought is exactly what happened two years ago. It's the same thing. It was like, ah, it's farther than we thought. That was two years ago. And now we're at 26, right? 2026, fall, October.

1:02:24Ben Bajarin: And now it's like, dude, now it's not even next year because you're constrained. And so it's 2028. And I just, that's not great.

1:02:34Jay Goldberg: It's not great. I will say there is a big difference between now and the last time they did this two years ago, which is I don't think we're up against existential questions about their future. Two years ago, it was like they needed to get to 14A and they needed to make it work. And now I think we're at a point where we're all pretty comfortable that 18A works, 14A, it's looking good. And 14A is real and will come. And their balance sheet is in much better shape than they were two years ago. and so it's no longer this long-term question of oh will intel survive it's much more sort of near-term tactical like what what's it going to take to really tap into this demand

1:03:22Ben Bajarin: yeah but i think i think what was also happening was there was again nobody knows intel's capacity we don't know why we make guesses guess how much i'm not sure they know i'm not sure they know okay fair fair but but but regardless like we we don't know right they've got mix and match of tile nodes so all their server products as well as panther lake go back to intel 3 as a base as a base die and sometimes even later there's products on intel 10 so those products right didn't ramp right they they never ramped those so sure they're constrained too so i get it but but the problem is I think people were hopeful that they had more in the supply chain, just surprised to the upside, to be able to capitalize on server CPUs and maybe to some degree have an early customer and foundry than they want, despite them talking about the triple digit growth for custom ASICs, which is a black box of a category right now.

1:04:22Ben Bajarin: We have no idea what that number is. it's in DCAI. And so it's growing up triple digits from what? A couple billion, probably. So it's still just in the single digit billions at the end of next year. Fine, not bad. But is that going to surprise to the upside to offset any of this? Right. So I think I think the concern I walk away with is, sure, growth's going to happen next year, but growth is constrained and capped based on that, you make your judgments accordingly as to where they're valued at. And it's not going to be as big or as high as you thought, because now any inflection for them in either capacity that comes up for foundry or bring in manufacturing, right?

1:05:07Ben Bajarin: Or sorry, construction isn't till 2028, right? And probably second half of 2028.

1:05:13Jay Goldberg: so i'm not going to talk to valuation i will say i i think your timing timeline sounds about right in the sense of when are we going to have a better signal on their business and know how they're doing i you know it's it's not going to be solved quickly it's not it's not and i'll tell Part of my frustration was like in callbacks, and on the main call, they kept like doing this weird thing where they're like, oh, we need more of this product, so we're going to do this fab at this node, and it's going to be a different... Like they kept moving around. Like it was really hard for me to keep track of what's going to be an Intel 10, what's going to be an Intel 3, what's going to be an 18A, and they're making big decisions there.

1:06:01Jay Goldberg: Like if I understood it correctly, They're talking about allocating fewer wafers to 18A and doing more on Intel 3, which I guess makes sense. But, like, I just, like, I guess the idea is, like, the server parts are a node behind. So you need more of that. So you're going to go to Intel 3 rather than 18A. But then what does that impact on learning for 18A and getting 18A yields where they need to be?

1:06:31Ben Bajarin: Because they're still not quite there.

1:06:34Jay Goldberg: and and i just realized as i'm saying this is like i'm pretty sure this is exactly exactly the conversation we had two years ago yeah like oh yeah so man so then so the so then the

1:06:46Ben Bajarin: the challenge is so intel 3 is the base die for panther lake and for the server product so that's partially it right so you you need that base die to scale so you can and you're right right panther lake was more 18a and uh that that'll happen with their next generation server parts it's just a little farther out than than we want um but yeah it is the chiplet part of this that means it requires some parts that never really scaled for your chiplets and so your demand is again you might have some tiles that you've got capacity for and you might have some tiles that you don't and you need to continue to ramp that.

1:07:25Ben Bajarin: So that's, as much as I love chiplets and disaggregated design and how it helps your effort, this is actually the downfall to not being monolithic. Planning for this across nodes is a very interesting challenge when you're mixing and matching anywhere from two to three process technologies on one chip in different tiles. So again, take that for what it is. That's a complex problem. What did we say? Complexed and nuanced. What was the term? Yeah. Yeah.

1:08:03Jay Goldberg: Yeah. That's what we're talking about here.

1:08:04Ben Bajarin: It was it was it was complex and nuanced or whatever the case is. And so that's one of those things where I get it. But again, right. Exactly what you hit on is now everything I heard, which is I mean, why why didn't they see this coming? Why didn't they plan accordingly? And then my other part complaint about the CapEx side is it was very clear, right? When they talked about they're doing this capital raise so they can go get all of the components that they need. And everybody was like, that's because they need substrates. So that's why this happened this month or last month. You know, what's happening in substrates is so constrained, which includes things they need for for emib um it's so constrained that i'm worried that you go and buy this now and you're capped at how much you can get for next year how much can you really get 28 because you know all your competitors have been trying to secure this up and try to secure it up through 2030 i'm worried that they took too long to do that capital raise and go get the substrates they need even for scaling in 2028 yeah i just i i um

1:09:22Jay Goldberg: my my take was they because they blamed the miss on substrate constraints that was that was the mpcs being off and mpcs off right and both of those were things that were very well known in the industry six months ago. And I think it is less a question of, oh, you couldn't get enough substrates. That's because you didn't plan it all well enough in advance. And I think this is, it's very clear to me that somewhere along the line in the last 10 years or the last five, Intel lost its planning capability. I assume it had it at one point, but they've clearly lost that muscle. And it is painful. It's painful to watch this now.

1:10:08Jay Goldberg: So I think they can sort it out. Like I said, I don't think that we're in survival mode. A lot of the data points they gave out about Foundry were actually really encouraging. Like where 14A yields were, about the demand for EMIB. That side of it sounded really good. It's just like it's gonna that was always a 2030 story it still is um and it's just the near term is going to remain

1:10:37Ben Bajarin: complicated it's multi-faceted and complex multi-faceted and complex that that is exactly right um okay just to tie this up and then we'll move on so like my again my concern is well they're in unfortunately they need to rebuild confidence again so like we have to go through this hopefully next quarter even though they're guiding down and whatever it's fine but they present positivity but i agree with you the direction of travel is right this is this is this this is not a question of can they survive? They're absolutely going to get customers. I mean, to be honest with you, like just for example, this came up like in so many different supply chain conversations I had on the back of, um, Andrew making a, making a big deal about their U S based manufactured PC using Qualcomm manufactured in by TSMC.

1:11:43Ben Bajarin: I have already heard through the rumblings that like the government's going to say anything that's made for our military or our use has to be U.S. companies and U.S. made on U.S. soil. So TSMC is great, but it's not, that's not an American company, right? I think that they're going to double down on these things. And so Intel is going to win customers for people who want United States-based GPUs made by a United States company, right? On this soil. That could be them. That could be NVIDIA. Like it doesn't matter. They're going to want it manufactured by a U S company here. They're going to get those deals when they can scale them, how much capacity do they have?

1:12:22Ben Bajarin: How much revenue is that going to be? Again, this is an end of the decade story. So fine. That that's going to happen. Um, it's just that all of this gets pushed out. So direction of travel, good timing, questionable, uh, management has to rebuild confidence.

1:12:39Jay Goldberg: There's our pillars. Yeah. That's that. I think that's ultimately comes down to, it's going to be a while before anyone trusts them again.

1:12:47Ben Bajarin: Again, I, you know what? Lip boo comes off as like so nice, you know, like on these things, like I want to know, like, I want to see angry lip boo behind the scenes. Like, is he livid here with people? Like, you know, like where, like where I would love to know. I mean, she's certainly not to be like, Oh, you know, it's okay. And it's like, no, something happened. Like I want to see angry lip boo behind the scenes. Like are people scared rattling in their boots now to, to make sure this doesn't happen again.

1:13:18Jay Goldberg: yeah um is he gonna do it again like i mean he kind of did it when he joined um but you're right i mean i i think he should do that publicly i think next earnings call he should get on and say hey we really let you down last quarter we're gonna fix it i've taken steps i've you know we're gonna cut these we're gonna cut a whole bunch of people uh this has to improve okay i don't know if he's gonna i don't know if he's gonna do that but like that would be that would be you know we We have we have key people from Intel who listen to this.

1:13:50Ben Bajarin: So there you go. There's our advice, folks. On on onward. How how assure us that this won't happen again.

1:13:59Jay Goldberg: Yeah. OK.

1:14:03Ben Bajarin: OK. Last on the docket of this very long episode, the longest circuit in history, which the week's the week's news demanded it. really weird news across the wire reported by Bloomberg that Marvell is in advanced talks to acquire Lumentum. It got clarified today as potentially an all-stock deal, which people were like, why do you do that if you're Lumentum? I have some opinions of what's going on here and why and why this makes sense, I guess. Apparently a deal could be announced at any time next week, which might be about the time that you listen to this. But what was your high-level take?

1:14:51Jay Goldberg: I think Marvell has repositioned itself as a networking company. We talked about this at other Analyst Day a couple weeks ago. Yep, yep. It is something that they've done very well. They have deep history there. They have a lot of good assets there. They bought Cavium. They bought Infi. Those have been very, very good acquisitions for those companies. for Marvell. And if you look across the optical supply chain, it is certainly a big area of growth. And Lumentum arguably is, you know, one of the critical players in all of that.

1:15:33Jay Goldberg: Set that against the fact that it is, you know, what's Marvell's$200 billion market cap and Lumentum's$100 billion market cap. So these are both big companies. And I think the reason it's all stock is that's the only way that Marvell could afford it.

1:15:53Ben Bajarin: I mean, yes, but okay. But why would Lumentum agree to that? Like what does Lumentum know? What do they know that's coming

1:16:03Jay Goldberg: that would make them agree to this? You tell me. I'm very curious now. You have a theory?

1:16:11Ben Bajarin: i i do i do i i think you're right in that maybe this is the only way this happens with marvell um again it comes back to like why why okay so let's say that lamentum has recognized what i think which is a uh unlike in copper where what i'm about to say probably couldn't have happened because there's a very diverse set of suppliers for that um i think in optical it makes a lot of sense for networking providers to be more vertical. Basically, I think everybody wants to be credo. I think credo's approach, plus if you had networking silicon, is very, very interesting. Marvell has that, networking silicon.

1:16:52Ben Bajarin: Broadcom, similarly. You could argue that Broadcom, in fact, our friend at a rational analysis tweeted out something that I retweeted saying, he thinks that Broadcom's lasers are as good as Lumentum's. If that's true, Broadcom's more vertical than people think, right? Supposedly Broadcom walks in and probably really hurts Lumentum Incoherent, if that's true. Okay. So what do you do if you're Lumentum Incoherent? You don't have certes, you don't have additional, you're a component provider of this, right? Your moat was that you have a part of a very complex supply chain growing these lasers that hasn't ever had to scale.

1:17:29Ben Bajarin: And that's it. What happens if that's not the standard? What happens if micro Vixels or micro LEDs or other things, right, come out and play. And you're not the only component provider. Okay, so my theory is they're afraid of disruption. They see the signs on the wall that they're not gonna have the moat or the leverage that they have much longer. This is a huge risk to their business, and this is true of Coherent. And they buy the idea that verticalization in networking silicon down to the optical level makes a lot of sense. Okay, so if that's the case, who else might be in this mix? NVIDIA, you know, like Marvell is not the only buyer, if I'm right, that networking to optical needs to verticalize and you want to control more parts of that supply chain down to the physical lasers as a component.

1:18:25Ben Bajarin: Why just Marvell? Like if you're willing to go stock only, go hit up NVIDIA. Like, you know what I mean? Like there's more buyers here for this if this is right.

1:18:35Jay Goldberg: But I think they fear disruption and commoditization of this space.

1:18:41Ben Bajarin: And that's the writing on the wall that I think they are wrestling with or have concluded to. But regardless, I think verticalization here, it makes a ton of sense.

1:18:53Jay Goldberg: I think that's a very bearish take on optical. Why?

1:18:59Ben Bajarin: Why? Because what you're saying is it's it's the optical.

1:19:05Jay Goldberg: But how is it not going to be a commodity?

1:19:10Ben Bajarin: No, no, I'm serious. I'm the curmudgeon here.

1:19:13Jay Goldberg: How is it? No, no, no.

1:19:14Ben Bajarin: But but but in all reality, other than the fact that right now there's no standard and two, they grow these lasers. And so that's a choke point, right? That's the moat. Um, if there was standards and more people or eventually when, uh, uh, optical wafers for this right scale and laser, you know, in five starts to scale because, because they are like the industry is, is, is getting to that point where they are scaling these things. It's just going to take a little bit of time. Uh, once that happens how are how is it not a come up it's interchangeable who has the best price wins so i think lumentum has something differentiated in their product i don't know how long they can

1:20:01Jay Goldberg: keep that but i think that they are not a commodity i think there's in in their in their the class of laser we're talking about it's them and broadcom so they have a very strong position and so i i think i agree with you long long term like five years from now are we really going to be talking about optical companies anymore right i think so no i don't think so i think i think we're going to have this big big build out somewhere in the next few years and then everything can get built out and then the industry will settle on some new steady state it'll be higher than today but it'll the growth will fade that's kind of implicit in your argument

1:20:39Ben Bajarin: um i yeah i don't know i don't know but yeah i'm saying it makes sense to be a part of other people's parts of the supply chain who like i said credo is a great example they win a lot because of how vertical they are in that side i think this is there's an argument a lot of people in networking need to be about vertical and in this case dude i'm telling you if if If Broadcom's lasers are as good, everybody's screwed. I'm sorry. Like Broadcom's wipes the floor with you. Like I don't see any way that that shakes out if that's true. And so that's, again, that's why I'm saying like these dynamics change for someone who's that dominant in silicon to be able to tie it down for CPO and NPO.

1:21:28Ben Bajarin: I have a laser strategy integrated. that that's very bad for everybody who's just a component provider yeah i no i i get that that

1:21:38Jay Goldberg: i think that's true and i think it makes a lot of sense for why marvell would want to own lumentum agreed to bulk them up against broadcom but why is lumentum willing to sell is another question because you're if if what you're saying is true that implies that they're they're sort of top-ticking they're selling at the top yes right correct and i don't have a view here i don't know what the right answer is but i'm just saying like like if you're saying this is as good as it gets let's sell now um who knows but um i think the the i do think though there is i'm not i'm not sure who else could could step in here and buy them i think that's why not nvidia so i think so first off shout out to reuters uh they had an article out this week reminding everybody that the department of justice is still investigating nvidia across a whole host of antitrust issues yeah right um that investigation started a few years ago part of it yeah hugging face uh sketch md which is which is slurm these are some really really important assets they're picking up oh and let's not forget grok which was not an mna but kind of an mna yeah right and so the doj is investigating them across all of that i'm not sure that nvidia could get this cleared while they're being investigated for those things um now could nvidia make it hard for barbell to buy lumentum i think that's that's possible too because i don't think marvell i don't think nvidia wants to see lumentum get acquired unless it's by them and i don't think they can acquire

1:23:23Ben Bajarin: i'm sure a hundred percent agree yeah absolutely

1:23:28Jay Goldberg: on on the other hand on the other hand like like nvidia does own what five percent of marvell

1:23:34Ben Bajarin: marvell that's right you're right so that's maybe by by association and partnership works out for them i i could see that right still still benefits nvidia it's it's one of those enemy

1:23:46Jay Goldberg: of my enemy is my friend kind of things that's exactly right because this is it it's it's against

1:23:51Ben Bajarin: it's like the world against broadcom yeah 100 100 so yeah but anyway i like i said this has just been speculating but like i said you think about all we've studied in optics i do i've always believed that this needs to be more vertical. I'm a big fan of Credo. The reason they win is because they're vertical in a lot of these segments. And I just felt like that makes a ton of sense. So who can verticalize here as deep as to the supply chain as possible for networking to networking silicon is going to have a differentiated advantage. Because again, it's you against Broadcom. Broadcom has all those things.

1:24:34Yeah.

1:24:36Ben Bajarin: all right all right everybody we pulled a longy on you we appreciate uh your time hopefully it was worth the hour and a half ish uh podcast we uh look forward to what next the next podcast and the week will bring in the industry that never sleeps and uh hopefully everybody's having fun and not losing their minds and uh we will talk to you next time have a good one

1:25:04Jay Goldberg: Thank you for listening, everybody. Tell your agents to subscribe to us.