Invest Like the Best with Patrick O'Shaughnessy
00:33:01 · Patrick O'Shaughnessy
[00:33:01] S0: as he
00:33:01 · Ben Thompson
[00:33:01] S2: really No, you're run no matter what. And you're gonna bring down the price of a container as low as it needs to be to cover your marginal costs. Now your paper losses in this situation might be very large because your accounting loss includes depreciation. But the depreciation is an accounting segment. You already paid the money. You're going to run that ship at whatever the market will bear in the container. The beauty of the container, it is a pure commodity. The cost of the market is gonna be the marginal cost. Now, if it gets low enough at some point, people will exit because their marginal costs, they're actually losing money on a shipment, not just paper money, but like actual real money. They will exit, but then the supply is diminished. So then the price will go back up and you get this interplay of sort of coming in and off. But then let's say the market's very high like it was during COVID. It's like, wow. We're making so much money right now because there's not enough supply. There wasn't enough supply of ships. So containers went from usually being like 3,004 thousand dollars to 17,018 thousand dollars. The amount of money that these shipping companies made in a very short amount of time was insane. What happens though? Well The more ships. Imagine if we had more ships. Right? The problem is it takes two years to build a ship. If everyone makes this decision simultaneously, you suddenly have a lot of ships, price plummets, etcetera. Where we see this is in components, in memory in particular. Memory, very famous for boom and bust cycles, people entering the market late. But to what extent are data centers going to be memory makers? Where right now everyone can see we don't have enough compute. So everyone's like, we absolutely have to be investing because there's so much money to make. And look at our payback period. The problem is you're measuring your payback period in a time of scarcity. Is that payback period gonna hold in a time of abundance? And the sort of the bulls say, there's never gonna be a time of abundance. AI We're gonna be short forever. Scaling. We're gonna be short forever, which maybe we will be.
00:34:57 · Ben Thompson, Patrick O'Shaughnessy
My concern is even if that's right, we could still have an air gap in that there's so much money going into it right now and not enough has come online to actually make sufficient revenues to handle the situation where we run out of capital. I believe in AI. I think it's a real thing. I think the economic impact is gonna be astronomical. I think all the concerns about societal impact are very real and are going to come to bear in a major way. You can believe all that and still be worried about, are we gonna make the bridge to this actually generating the level of returns necessary to continue to fuel this sort of going forward? [00:35:31] S0: Can you zoom in on TSMC and the component makers where fabs are involved? And so far, at least my understanding is that they've been quite conservative in their willingness to expand capacity, build new fabs, meet the market's demand with similar growth, which they have not done. If that just rate limits this whole thing and prevents us from getting one of these giant overbuilds?
00:35:52 · Ben Thompson
[00:35:52] S2: We can talk about a few different ones. Like, we'll start with memory. Memory used to have tons and tons of memory makers. Every time there'd be a boom, memory makers would sort of reenter the market. New countries would come in like Taiwan used to have like a memory market, but you would get these exact dynamics. If there's a shortage of memory, there's so much money to be made. You can't bring capacity on immediately. It's the same as shipping, the same as what we're seeing right now. That would spur people to come in the market. You'd get too much capacity, prices would plunge and people would just get blown out. Because the issue is the upfront cost for these is so large, just like buying a ship, like building a fab is even more so. And memory now, like the leading edges of memory are using things like EUV machines. So the costs are getting into the billions of dollars for these lines. What happens is every time with these boom and bust cycles, some people would enter, more people get washed out. You go through these famous historical moments for these memory cycles. Companies just get blown out. One of the most interesting actually memory stories is how Samsung sort of took over memory was they saw it as an opportunity and they had studied history and they realized that actually the way to take over the market is to invest into downturns so that you're ready when the next cycle comes around, which requires a ton of guts and a ton of discipline and a ton of money. But they did that and basically wiped out the Japanese. That's when the South Koreans generally took over the market in a major way. But it got down to three. And the problem is three, it's not a monopoly, but it's kind of an oligopoly. And they all got a lot more discipline about let's not make the mistakes of the past. And we're not colluding, but we all are on the same page about let's not do that. And I think that dynamic sort of ran head on to the current moment where it just took a while for them to realize, no, there is a secular shift in memory demand that didn't exist for a very long time. I think the memory solution will be solved eventually. The other risk they run is Apple's lobbying to get Chinese memory. What is the number one focus of like arrhythmic changes? How can we use less memory?
00:37:59 · Ben Thompson
I think the memory makers probably screw themselves in the long run by creating such a massive target on their back. I've analogized memory makers to Iran. The issue with the Strait Of Hormuz is it's very effective. It's more effective if you don't use it, because then it's always hanging out there as something you could do. Now they did it. Turns out it worked. But The UAE and Saudi Arabia, they're gonna build pipelines. They're gonna build new ports. They're not gonna let this happen again. It's very painful right now, but say Iran wants to close the Strait of our moves in 2035. It's not gonna have any effect because it will have been built around. My concern for the memory makers is they might have done the same thing. No one's gonna let themselves get in this situation again, as far as memory goes. TSMC is arguably worse because there's only one. There's one company on the leading edge. Obviously, Intel and Samsung are trying to get there. It's the same thing. All markets carry risk. And a lot of the question is who ends up holding the risk? What I think a lot of the tech companies didn't fully appreciate is the extent to which TSMC has offloaded risk onto the big tech companies. And the way they've done that is the risk that TSMC is worried about is overcapacity. If we build too much, it's not just that we built too much and we have all these fixed costs that are not being fully utilized. But if we build a fab, we expect that fab to run for thirty years. We've, like, baked in too much capacity into the system for years and years and years. So they are very biased towards being much more conservative. There's a little bit of a culture component to this too. One of the most interesting TSNC stories, it's kind of a nellus, that Samsung story, was Morris Chang retired in like the late two thousands. New leadership took over. There's the great recession. And so they pulled back their planned spending. He comes in, fires everyone. And he's like, the iPhone just launched. This is the biggest opportunity we've ever seen. We need to be investing, not cutting. And they invested through the great recession and through that downturn. That's what laid the foundation for them taking over sort of leading edge semiconductors in that time. Morse Chang is a one of one on the Mount Rushmore in my mind of the greatest and most impactful tech exec is of all time.
00:40:11 · Ben Thompson
The entire fabulous model is so critical to what tech is and what it does. And also just the guts to do that at that time, particularly in someone who lived there, a culture that doesn't necessarily tend to make those sorts of bets. TSMC, they were pretty conservative, to be totally honest. So what happens though? Where'd the risk go? TSMC's like, we don't wanna take the risk. Risk doesn't disappear. It just moves. The risk is right now where you have every single big tech company realizes if we had more compute, we could be making more money. So there's lots of foregone revenue and foregone profits that is the manifestation of the risk that TSMC handed off to them. Risk doesn't disappear. It just gets handed off. And sometimes that risk doesn't manifest in losing money. It manifests in not making money. And there's money not being made right now because what happened was they were very excited about five gs. They did a big wave of like investment, expanding their fabs in around 2020, 2021, '22. And they're like, oh yeah, we're good. Like I said, 2024, Cheshire Bucasal 2022, big thing in tech in 2023. In 2024, their growth rate went down. In 2025, their growth rate went down. In 2026, it's up now. It was very funny because I was writing about this a while ago, and then I think it was like one or two earnings calls ago. Suddenly CC Way, the CEO and chairman is talking about like use cases for AI, the whole earnings call in a way he never had before. This is why the money makers are scared. Usually there's like a bullwhip and they're worried about being at the end of the bullwhip where the demand happens and it works its way down the chain and they're at the end and then they double down. It's already too late. They're wasting all their money. And I think the thing with AI is if it's a bullwhip, it's like the longest bullwhip of all time. There's still so much to be built. And it just took a while for Asia to get the message where these sort of companies are. I think they've by and large gotten it, but them getting the message, it then takes several years for that to actually materialize.