The State of the AI Industry is Freaking Me Out

I love a good graphical representation

of reality. Now, they're never perfect.

There's always data that's being left

out,, but, I'm, going to, talk, today, about

one that contains a lot of information

and was took a little bit of time for me

to parse. And once I did, it kind of

terrified me. I'm going to show it to

you as well. What a good little

visualization we have on our hands here.

How Nvidia and OpenAI fuel the AI money

machine. So, very quickly to explain

Nvidia makes the chips that do the

compute that creates the artificial

intelligence systems. OpenAI is the

biggest company that creates the systems

that use those chips to create

artificial intelligence systems that do

stuff. Not just the chatbot, but also

all of the other things that it does

including, you know, Sora 2, which

you've heard my opinion on. And then

there's Microsoft. You've heard of them.

AMD is another chipmaker like Nvidia

Oracle, and a few others in here like

Cororeweave, possibly some others. I

actually don't know what all these

companies are. I think Nscale might be

one as well, but it's the little dot.

Little dot. Oracle and Cororeweave at

least are the companies that have build

like the data centers and they buy chips

from Nvidia and then they like lease out

the compute. They sell that. So

basically Intel and AMD and Nvidia sell

chips to the AI companies or to the data

center companies and then the data

center companies sell the compute to the

AI companies. Sometimes the middleman

running the data center is there

sometimes it's not there. But in either

case, Nvidia is doing very well because

so many people want their chips right

now. But we can think of it as like AI

companies, chip companies, and then the

middlemen, compute companies. What the

AI companies want is to be able to keep

existing right now. Open AAI worth $500

billion has $12 billion of revenue.

That's not profit. That's the amount of

money they made total. Their profit is

deeply in the negative. And Nvidia has

extremely high profit. They make way

more money than they spend because

people really want their chips right

now. And so they'll pay way extra for

them. And they're the best chips.

They're the best chips. Crunch, crunch

crunch crunch crunch crunch crunch

crunch, crunch, crunch, crunch. There's

a huge amount of demand for those chips.

The prices are way up. It's very good

for Nvidia. That's why they are the

largest company in the world and are one

company that is worth more than the

entire pharmaceutical industry combined.

But even then, even with their

absolutely bonkers margin that they have

right now, their price to earnings ratio

is extremely high. So the value of all

Nvidia stock combined is much higher

than you would see with a normal

company, which indicates to belief among

investors that the prices of those chips

will keep going up and the number of

chips produced will keep going up. So

Nvidia desperately wants to keep the

prices of their chips the same or

higher. They want the demand to increase

faster than supply, but they also want

to increase supply dramatically so that

they can sell more things. So like more

sales and more profit equals more

earnings. People who are sort of on the

AI isn't a bubble train right now. What

they're saying is, well, if it's a

bubble, why are the prices of Nvidia

chips continuing to increase? There's a

huge amount of demand there. People are

buying them. That can't be entirely

irrational. So keep that in mind. the

demand for Nvidia chips far outstrips

the supply of Nvidia chips and the idea

is that will continue to be the case

even as supply increases but first

quickly the sponsor of this video ground

news I don't know about you but one

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really covered on one side of the other

is meant to outrage you a little bit.

But there is this story about Governor

Nuomo signing a new law to protect kids

from the risks of AI chatbots. I do not

know about this. I had not heard about

this at all until I like went on and

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organizations on the left. One of my

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good job. So like Los Angeles Times or

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have already paid for and not have to

worry about a payw wall, which I

sometimes do with the LA Times, though

in this case it appears not. Uh they're

letting me have this one. It requires

chatbot operators to have procedures to

prevent the production of suicide or

self harm content and put in guardrails

such as referring users to a suicide

hotline or crisis text line. It seems

like a good idea and unfortunately I

know why. They have had to do this. And

it's not the only bill he signed. Some

of the other legislation he signed

tackled issues such as age verification

social media awarding labels, and the

spread of AI non-consensual sexually

explicit content. And again, I will say

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Okay, back to the video. We're going to

leave the middleman aside right now and

we're, going to, look, at, the, AI, companies

cuz then what you have is OpenAI, a

company that's now worth a half a

trillion dollars according to a recent

fund raise. And OpenAI has $12 billion

of revenue. It has no profit and it is

by far the largest AI company. And with

this $12 billion of revenue, they are

spending hundreds of billions of dollars

on these chips. And OpenAI, I don't want

to say that like they couldn't do more

than they're doing right now, but

they're not like brand new. They've been

selling their services for a while now.

Could they increase the price of their

services? Yes. Do they seem to think

that that would be the thing that does

it for them? No. Like they're creating

feeds inside of their systems. Now

they've got a feed inside of ChatGpt

where like when you open it, it's like

"Hey, just like read some stuff. Just

read some stuff that I prepared for you.

Instead of asking me questions, here's

stuff that we think based on what you've

talked to me about before you might be

interested in." And the play there is

obvious to me, which is they've said

that they don't want to put ads inside

of the experience of you just asking it

questions, but they haven't said that

they won't put ads inside of the stuff

that it just provides to you. And if

it's just providing stuff for me, maybe

sometimes it will provide stuff for me

that paid to be there. Also, maybe like

Sora's slop talk thing is also a thing

where they could put ads though. I can't

imagine that anyone thinks that that

there will actually be a lot of people

who spend time on slap talk, but maybe.

You never know. irrational exuberance

and all that. And thus you have the

other side of the argument. The people

who say that this is probably a bubble

they're saying, "Okay, well, there's

demand for OpenAI services. People use

them. They're using them more and more

as time goes on. But you can't say that

at the moment the demand is outstripping

the supply. There's plenty of supply to

meet the demand. And right now, OpenAI

according I think to them, they lose

money every single time you use one of

their products. like the amount that it

costs to train and use the models is

more than the amount that they are

charging even for their top $200 a month

tier. In that case, it's possible that

they could charge 10 times more to their

enterprise clients and to their consumer

clients and all those people would keep

paying and they would be a profitable

company. But would that actually work?

Like would the $200 a month people pay

$2,000 a month? But even more than that

is it true that the demand for Nvidia's

chips is increasing or is Nvidia

creating that demand? And likewise, is

it true that the demand for OpenAI

services is increasing? Or are they

increasing that demand? So, let's start

with OpenAI. There's obviously a lot of

arrows coming in and out of this. We're

going to, start, with, the, ones, that, have

green arrows. There's a healthcare

company, Harvey, and Anphere. These are

companies that pay money to OpenAI, but

that OpenAI's venture arm has also

invested in. So they're investing in

these companies and then the companies

buy services from OpenAI. That's a bit

of a loop. Now they're not investing

like the exact same amount of money.

Probably they're investing less than the

companies are paying but that is an

example of like a circular system here.

We also see these green arrows which is

venture capital pointing out from Nvidia

to Maestro to figure and XAI and all of

those people take that venture capital

investment and then they buy Nvidia

chips. So, if you're in the anti-bubble

case, then you do have to ask, well, why

does Nvidia have to invest in these

companies in order for them to buy their

not it's not like a quid proquo here

but like why can't the companies just

get investment from elsewhere outside of

Nvidia to do those investments? It's a

little, weird, and, I, think that, it, makes

sense that people are worried about it.

Now, none of these arrows have dollar

values on them, which is a little bit

frustrating for me, except for the most

important one, the one that sort of

created this whole conversation about

roundtpping, which is this one. Nvidia

has agreed to invest up to hundred

billion in Open AI. And that investment

comes along with the purchase of chips.

So, to unlock more and more of that

investment, they have to buy more and

more of the chips. That's basically

paying Open AI to buy Nvidia chips. Now

it's not like the exact price of the

chips. It's less than the price of the

chips. So basically about a quarter of

the money that the chips cost is getting

discounted off the price of the chips.

And in exchange, and I am simplifying

here, but in exchange for that 25%

discount, Nvidia is getting ownership

shares in OpenAI. At the same time as

that is happening, with this money going

to OpenAI, OpenAI signs a $300 billion

deal with the middleman, Oracle, who's

now build the data centers and run the

data centers. $300 billion on revenue of

12 billion for a company that is not

brand new, that has been around and that

everybody knows about and that lots of

people use and that lots of people have

found a hard time figuring out how it

integrates well into businesses in a way

that is worth spending a lot of money.

$12 billion. They have these huge

contracts with lots of companies, but

still $12 billion is the amount of

revenue they have. They're spending $300

billion on a service contract. That's

this darker blue line, a service

contract with Oracle. So Nvidia invests

in OpenAI. Open AAI signs a service

contract with Oracle. Oracle in order to

build this data center has to spend tens

of billions of dollars on chips. All

these pink arrows going in to Nvidia.

These are all these companies buying

chips directly from Nvidia. So they're

all paying money into Nvidia, which is

why they're the ones who are winning the

most in this. And also there's this one

arrow pointing out of Nvidia to

Cororeweave which is a service agreement

saying Nvidia will lease its own chips

that are being sold to Cororeweave. So

Core is buying chips from Nvidia and

then Nvidia has said we promise that

we're going to pay you to use those

chips once they're in your data center.

And not only that, they have promised

that if Cororeweave, this data center

company, if they don't get enough

contracts to use all of the chips

Nvidia will just take all of that excess

processing power and pay for it. So

they're guaranteeing the value of the

chips to Coreweave, why would they be

doing this if the demand for the chips

is so high and the profit margin on the

chips is so high. So the anti-bubble

argument that I have heard from analysts

who are much smarter than me and know

more about this is that the price keeps

going up for these Nvidia chips. And so

they're like the demand is there, but

the chip isn't the product. The AI

service to consumers is the product. And

right now that is an order of magnitude

under the amount of money that is being

spent just on hardware. Not even

including staff time and the power and

the water and the buildings and all of

that stuff. The amount of money being

made by AI companies is an order of

magnitude lower than just the money that

is going to Nvidia every year. And by

doing deals that basically give

companies money to buy Nvidia's chips

they are selling their chips at an

effective discount. And yet, at every

one of these steps of the process, as

this money flows around, these companies

get more highly valued. When Oracle

signed this $300 billion a year deal

with OpenAI, their stock price shot up.

When Nvidia does venture investment in

XAI, which then turns around and buys

Nvidia's chips, that is offering the

chips at a discount. So, once you parse

this fairly information dense, though

there could be more information on it

and that would be good. But once you get

your mind around this little graphic

here, it doesn't seem like Nvidia just

thinks people are going to buy their

chips at the prices they're selling

them. Nvidia seems to think it would be

better for our share price if we found

ways to artificially increase the demand

for our chips. Like by paying the people

who buy our chips to buy our chips or

investing in companies that buy our

chips so they can buy our chips. And

Nvidia has so much money that like what

else are they going to do? Their price

is so inflated. their stock is worth so

much and they have so much money that

they can subsidize the purchase of their

own chips and when they do that the

stock market rewards them. This money is

just flowing around and at the root of

it is not the demand for Nvidia chips

because Nvidia chips are not the product

being sold. The product being sold is

artificial intelligence systems. Look

it might someday be this big, but it is

not anywhere close to that big right now

and it's not brand new. In order for it

to be this big, it has to create so much

value. And we have to create new systems

for capturing that value. Besides just

firing everyone and having computers do

all the work, Microsoft is the only

major player on this graph that is

buying Nvidia chips that doesn't have a

direct relationship. They do have this

one little connection through Nebius

and I don't know what that is. Where

Microsoft is paying Nebus for a service

while Nebius is getting investment from

Nvidia. My god, I don't know how big

that is. You want to Google it with me?

Oops. I don't want to show you all of my

text messages. That was just my dad. It

was probably okay. Don't read my text

messages. Microsoft secures 100,000

Nvidia GB300 chips via 33 billion deal.

Okay, so it is big. That's actually

huge. Oh my god. So Nebius is like an

oracle but for just AI. I have gotten

this take your guest house to the next

level ad so many times. I probably

accidentally clicked on it once and

they're like, "Yeah, I bet you're

interested in nano walls." I thought it

was, going to, be, nano, walls,, but, it

actually says nano wall. It's where you

keep your nana. She's in the walls. So

yeah, it's getting a 100,000 Nvidia

chips from a company that Nvidia has

invested in. Even Microsoft is getting

discounted chips. I don't know you guys.

Seems fine. I have seen the simplified

version of this pitched around which is

like Nvidia gives $100 billion to

OpenAI. OpenAI gives $100 billion to

Oracle. Oracle gives $100 billion to

Nvidia. It's not exactly like that. It

does prop up the demand for Nvidia chips

by making it so that you're giving money

to people in exchange for them in some

cases directly in exchange for them

buying Nvidia chips or you're just

investing in companies so that they can

buy Nvidia chips. It just seems messy.

It seems like bubble mechanics to me you

guys. So I am again just a guy. I don't

know why I god I got to get back to

talking about rare earths and fish. I

got to get back in my lane. That's what

you want anyway. You don't want this. I

should be talking about batteries and

climate change and the moons of Saturn

and my favorite fish, but instead I

looked at that figure for too long.

Let's play Connections. I'm worried

because the last like three have been

really easy. Swift kite. Those are

birds. Robin is a bird. Oh, interesting.

We've got like Batman Begins, Batman

Forever, Batman Eternal, Batman Returns.

Is that what it is? Is that Batman

thing? We got Swift and Robin. Robin is

also a Batman thing. There's got to be

Oh, Swallow. Great. Those are all birds.

But Swift kite and swallow are much more

similar to each other than Robin. Is

there another bird like that? Robin is

just a normal bird. Swift kites and

swallows. Very similar birds. I don't

know why. Wow, this is weird.

Everlasting and permanent. Okay, well

we got that one. Now, this looks like

it's, going to, be, easy,, too., Everlasting

forever, permanent, and eternal. Okay.

Launches institutes pioneers begins.

And that leaves us with returns ending

pioneers and days. Returns ending

pioneers and days. Uh, okay. Well, that

does seem like what it is. And I don't I

don't mind doing it real fast. Kite

Squall, Swift, Robin. Those are all

birds, and they're the only birds here

so I feel like that's it. This is like

creates and puts into the world

launches institutes pioneers and

begins. In addition to that, we've got

things that go on forever, eternal

forever, permanent, and everlasting.

Which leaves us with, I think, days

returns, ending, and trails. Happy days

happy trails, happy returns, happy

ending.

Happy trails. That has two meanings now.

But there is another one if you're just

thinking of the one. And then these are

all the same to me. Maybe the bird is

second., Yeah., Yeah., All right., And, then

I get 50/50 chance here. Everlasting

institutes launches begins and pioneers.

That seems a little bit harder. That was

that was easy. That was another easy

one. All right. I'm feeling it. Woo.

Yeah. Another one of five. Okay. I don't

know what's going on you guys. They're

taking it easy on