00:00 Speaker A
In a research note out this week, Seaport Research partners makes a call that the AI trade is indeed in the early days of a bubble driven by spending from six major companies, Amazon, Google, Meta, Microsoft, Open AI and Oracle. It comes as the tech sector has announced a wave of deals between some of these players. And joining me now to break down that call, Jay Goldberg, Seaport Research partners senior analyst. Jay, it’s good to see you. Thank you for being here. Um, and you know, you say it’s a bubble, but that’s not necessarily a bad thing or it’s not necessarily imminent that the bubble is going to burst, I guess is what you’re trying to communicate.
00:46 Jay Goldberg
That that’s right. I think we’re in a bubble, but we’re in early stages of the bubble and you can still make a lot of money. The stocks can still go up a lot from here. Um, but I think people just need to be aware that they’re they’re we’re we’re starting to get a little bit beyond the realm realms of rationality and into more sort of faith-based, uh belief-based investing.
01:14 Speaker A
Well, when you talk about those six companies that are so pivotal to this AI trade, of course, there’s been a lot of concern that everything is riding on just a few players. And even among those players, I mean, Open AI is unique, as you point out, in that it doesn’t really have cash flow. The others do have good cash positions. But the other, I mean, you know, we have the six up here, but it maybe open AI should be in the middle of it rather than just one of the others, right? Because doesn’t it seem like it’s sort of the center of the web in some ways?
01:52 Jay Goldberg
So, I I think that’s the important thing that’s taken place right now. In the last few weeks, we’ve seen two, I think big changes in what’s what’s sort of the pacing of things. The the first is Oracle is now taking on debt to fuel its growth. And if you look at sort of historical bubbles, once you enter the company’s taking on debt phase, that accelerates things. Debt is great on the way up, uh it juices things, but it’s it’s an amplifier. So it it’s good on the way up and it’s you know, it’s makes things extra painful on the way down. Uh the other big shift is that Open AI has been, like you said, in the middle of lots of deal making, uh and it’s an interesting company.
02:37 Jay Goldberg
It doesn’t, it doesn’t make a profit, doesn’t have free cash flow. It’s actually has pretty serious negative free cash flow. Uh and they are the the most aggressive out there signing deals. Um just in the last two weeks, they’ve talked about adding 16 gigawatts of capacity, which is just a staggering amount uh of compute. And uh there are a lot of legitimate questions about where they’re going to get that money from and what it’s going to take. But critically, I think all the other names on that list are watching what Open AI is doing and are afraid of missing out. They don’t want to lose to this uh this startup. And so they’re going to spend aggressively to keep to keep up with that. And that’s why I think the this bubble will keep it’ll keep growing.
03:22 Speaker A
And as it keeps growing, I mean, what in the past when we’ve had bubbles, there’s always sort of a precipitating event, even if it’s a small one, that call causes the house of cards to come down to mix my metaphors. What what could how could that possibly play out this time? What should investors be watching for?
03:47 Jay Goldberg
So, I think there’s a lot of ways that it could it could fall. Uh in particular, once you start adding debt, then you have timing becomes really important. And I don’t think this is, you know, I don’t think any of the the companies on the list other than Open AI have problems with credit or making their their debt payments. But there are lots of other entities sort of below them, right? You go first to the to the neoclouds, companies like Core Weve and Nebius and Cruso and Lambda. Uh they’re all taking on a fair amount of debt to finance this. And then beneath them, there’s another layer of special purpose vehicles and smaller funds, smaller companies that are building all this. Uh and it’s not quite a house of cards, but they are we we are dealing with smaller entities that don’t have strong balance sheets, that don’t have strong cash flow. And and things it’s it’s easy to see them getting tripped up and causing wider spreading problems.
