Downside at AI. Part #2
Red Flags in AI: Satya’s Take, Nvidia’s Margins & the Custom Silicon Threat.
In Part 1 of Downside at AI (from last October) we discussed investing in the AI theme in a top-down manner — and the misunderstandings around it.
I illustrated the Techno-AI Boom/Bust cycle using Soros theory and terminology, concluding with the flaw in the process: “How much value does AI really create?”
On February 19th, Satya Nadella practically raised the same question in the interview he gave on the Dwarkesh Podcast — the indices peaked and sold off since that day.
Satya’s responses raised some red flags. We will discuss them in this post as well as:
The DeepSeek event
Microsoft distancing itself from Open AI
Commoditisation of AI, across the board
Where is the value creation?
Nvidia margin compression
Custom Silicon and the ASIC threat to GPUs
Let’s start chronologically…
In late January of this year, the DeepSeek AI chatbot was released, powered by the DeepSeek R1 model.
The DeepSeek precedent shook markets, and specifically the Semis/AI theme — by proving it could match the performance of other AI Chatbots like Chat GPT, while using significantly fewer resources.
The response was that DeepSeek was lying, cheating, stealing or all of the above. I can’t know what the absolute truth is, so I won’t bother trying to figure it out. We aren’t trying to shoot for certainties and absolute truths here — we are always decision-making under uncertainty.
This is what I wrote at the time.
EXCERPT from Is DeepSeek the needle that pins the bubble? 📌
However, the DeepSeek event has made a number of expectations a REALITY — and that reality sets in motion other events and raises certain questions.
My thoughts in bullets:
You cannot ban and sanction your way to AI Supremacy, a concept I have been saying does not really exist. The more you push the Chinese (or others), the more they would react. We knew this, here.
We see now that the development of LLMs is not an extremely-high-cost esoteric process only for a handful of companies that can muster the required resources. It is now basically democratised and available to entities with much much fewer resources.
This throws a monkey wrench in the BIG IDEA of hoarding GPUs and buying as many as possible, to maintain a supremacy and lead in the AI Race.
Will this cause Big Tech (i.e. the big spenders) to pull back just a tad bit in their capex spending? All those Data Centers that they have been getting grilled on? All that capex which hasn’t really had an ROI?
What will happen to NVDA’s 80% Gross Margins that we’ve been talking about, anon?
Will the whole Semis/AI complex now become a price TAKER rather than a price SETTER? Oof, this is a big one. This is the money right here…
Will big AI-related projects “pause” due to a wait and see? This is highly probable.
END OF EXCERPT
Back to Satya’s red flags now 🚩🚩🚩