How the Silicon Valley Robber Barons’ New Tech Bubble Won 2024
The problem with overpromising and under-delivering is that it catches up to you. Some Wall Street firms and Silicon Valley funds are already raising concerns about whether AI companies can achieve a return on the hundreds of billions they have spent. Sequoia Capital, one of the nation’s most prominent tech funds, noted last year that there is a growing gap between the amount of investment into hardware and software and the revenue that it generates.
Consider the following: For every $1 spent on a GPU, roughly $1 needs to be spent on energy costs to run the GPU in a data center. So if Nvidia sells $50B in run-rate GPU revenue by the end of the year (a conservative estimate based on analyst forecasts), that implies approximately $100B in data center expenditures. The end user of the GPU—for example, Starbucks, X, Tesla, Github Copilot or a new startup—needs to earn a margin too. Let’s assume they need to earn a 50% margin. This implies that for each year of current GPU CapEx, $200B of lifetime revenue would need to be generated by these GPUs to pay back the upfront capital investment.
Sequoia’s original version of that analysis was written in September 2023. When it revisited the question this summer, that number had risen to $600 billion of revenue needed just to pay off the initial investment. In the September version, it estimated that companies were only $125 billion off in annual revenue to meet that goal. Investment costs brought that number up to $500 billion when they reran the calculations this summer. These are roughly hewn figures, but they illustrate the scale of the problem: Way, way more money is being spent on AI than is being made on AI at the moment.
As a result, the valuations of some AI companies—and, thus, the wealth of their investors—are starting to look a little wonky. OpenAI, the top AI firm in town, recently announced an additional $6.6 billion in funding, bringing it up to a whopping $157 billion valuation. That would make it as valuable on paper as nine-tenths of the S&P 500 combined. Even though OpenAI had a net loss of $5 billion this year, it expects to make $100 billion in revenue—but not until 2029. Nvidia, the world’s largest chipmaker and a key supplier for AI companies, surpassed Apple as the world’s most valuable company last month at a $3.57 trillion valuation.
