Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: So suffice to say, I think the assessment today or your assessment of the demand side is completely explosive in your own particular example here at SemiAnalysis. But just more broadly that – you call it AI psychosis, as people fall into this experience of what they can do, the implementation difficulty going completely away. I've certainly felt that. My own token spend is just through the absolute roof, just in a matter of weeks. So that feels like a pretty good assessment. Anything we're missing on the demand side?
· Dylan Patel, Patrick O'Shaughnessy
[00:00:00] S1: If you don't use more tokens, you'll never escape the permanent underclass. Either you use more tokens and you generate economic value, outsized economic value for the use of those tokens. A lot of people are doing it the boring, lazy way. Oh, I guess I'll just work one hour a day instead of eight hours a day and I'll have AI do most of my job. That's the boring way. The cool way is I'll still work eight hours a day and I'll do 8x the work and maybe I'll make 5x the money. You can't do this with a job, obviously. There's people who have multiple jobs and there's people who start companies and start selling stuff. There's people who are hustling, which is what I view like you and I is doing is we're mostly hustling. Get that economic value on this AI before everyone is using it and it's table stakes, because it's still not table stakes. So if you don't use more tokens and generate the value from them and capture that value, there's three different problems here. Using more tokens, generating value from those tokens, and capturing value from the value that you created from the tokens. If you don't do these three things, you'll never escape the permanent underclass, i.e. as models continue to skyrocket and capability and the concentration of resources potentially happens. [00:00:00] S0: All right, let's talk about supply. What is changing at the frontier of supplying the entire stack that's required to serve all these tokens as the demand curve explodes?
· Patrick O'Shaughnessy, Dylan Patel
[00:00:00] S0: All right, let's talk about supply. What is changing at the frontier of supplying the entire stack that's required to serve all these tokens as the demand curve explodes? [00:00:00] S1: As demand skyrockets, prices are going up for everything on the supply side, whether it be the end GPUs, their prices are going up. In addition, their useful life is extending. [00:00:00] S0: H100 prices look like this.
· Dylan Patel
[00:00:00] S1: Yeah, exactly. There's people who have argued GPU useful lives are less than five years. Complete nonsense. There are clusters now re-signing. Three or four-year-old Hopper clusters re-signing for three or four more years. There's A100 clusters that are re-signing for another couple years. So the useful life is clearly not five years. It's maybe even seven or eight years, arguably. We don't know yet. We'll see when Hopper gets there, but it's clearly not five years. So useful life is extending and the prices are going up on that renewal. In effect, the gross margin was not 35% on a cluster. It's beyond that. So margins are expanding in the cloud layer. Margins are extremely healthy on the hardware layer with NVIDIA still charging 75 or whatever percent gross margin. As we move down the stack memory, obviously margins have skyrocketed there. Places like Optics and Logic, there are large prepayments and margins are growing slowly. More so, the companies that are making chips like NVIDIA are paying huge prepayments. So in effect, the cast of capital or timing of cash flows or return on invested capital is going up even if the gross margin isn't. And you see this across the whole supply chain. You see ASML is completely sold out and they need Carl Zeiss to expand faster. Everyone's either sold out and margins are going up or they're getting prepayments, which increases the return on invested capital because the invested capital is lower. And so this is a consistent trend across any part. It's even like – to make a PCB requires copper foil, and that copper foil is sold out and people are making prepayments for it. Anything and everything that has a pulse and is sold out, people are jumping to get more incremental supply and fighting over the supply for the years after.
· Patrick O'Shaughnessy
[00:00:00] S0: What do you think are the most important bottlenecks? Typically in economic history, when there's this kind of demand, supply reorients and rises very, very quickly to meet the demand. It seems like it's almost impossible for supply right now in this moment to keep up. Famous last words, every shortage is followed by a glut historically. But what are the most interesting bottlenecks to you across the supply side?
· Dylan Patel
[00:00:00] S1: Supply chains are usually very fast to react. One unique thing is that our supply chains now are more complex than ever. And the things we're building are more complex than ever. And therefore the lead times are longer. And it's not like we haven't seen 18 month long lead times in other industries. It's just building incremental supply didn't take years. And this is the case with memory. Memory can only grow capacity low double digit percentages a year, right? 20, 30% a year, even less for NAND, a little bit higher for DRAM, but whatever. Even though the demand signal was very strong at the end of 2025, the memory companies immediately started reacting. None of that incremental capacity really gets here until the second – they've decided to do in addition to the typical 20 to 30% – they can stretch a little bit, but really the true incremental supply doesn't come until 28, which is a very unique thing. Even if they wanted to build as fast as possible, it doesn't come till 28, late 27 at best. So the result is memory prices have gone through the roof. And guess what? They're going to double and triple again. At least on DRAM, especially. People are like, oh, the memory story is overplayed. Everyone gets it. And it's like, no, no, no, you don't get it. DRAM will double or triple from here still, because that's how much capacity is required. And they have to steal capacity from somewhere else. And the only way to steal capacity from somewhere else in a capitalist economy is demand destruction via higher pricing. We're not rationing stuff here. And so ultimately, that's what's going to happen. And so margins continue to go up. I think Logic also has humongous capacity problems. TSMC just had their earnings. They keep upping CapEx. Ultimately, it takes them quite some time to build fabs. And they're trying to do everything they can to squeeze every little output out of every fab that they have. But ultimately, they're not raising prices fast because they're good people, it seems like. Single-digit price increases instead of triple-digit price increases like the memory guys have had. So you ultimately have this market where, yeah, TSMC is a great company, but are they actually going to extract all the value? I mentioned things like copper foil, glass fibers for PCBs, lasers.