Invest Like the Best with Patrick O'Shaughnessy
· Gavin Baker
[00:00:00] S1: Someone once said America was going to suck as hard as it can on every energy source it can get. I just think the same is true of compute. It's why I'm probably less worried about an Edge AI bear case than I was. We're going to consume as much compute as we can. Inference is very sensible for orbital compute. Training will be done on Earth for a long time. So I don't think this is super bearish for terrestrial data centers. Those are going to be valuable for my lifetime. But if you are in this ecosystem of power production and cooling and you are massively ramping capacity, a lot of these capacity ramps are going to be hitting just as all of the silly skeptics start to understand that orbital compute is very real. It's worth thinking long and hard about that if you're one of those companies. All sorts of cool stuff is happening in the interim. We're getting really good at repurposing jet engines. There's Boom Aerospace doing this. Capitalism is hard at work on watts. On wafers, though, it's just this group of flinty, older humans in Taiwan who are the most important humans in Taiwan. Whatever they are — the overwhelming fraction of the country's GDP, water usage, electricity usage. They talk about the Silicon Shield. They all view themselves as inheritors of Morris Chang's sacred legacy. I vividly remember visiting Science Park more than 20 years ago and talking to them, "Do you think you could catch Intel?" And they said, "This is such a beautiful dream, but it's a dream for our grandchildren." And they did it, partly because of Intel's self-inflicted wounds. They think very differently. One reason Jensen flies over there so much is he wants them to expand capacity. It's wild that Jensen has never had a contract with Taiwan Semi. They do business on what seems fair, in handshakes. Just fascinating. No contract. It's going to be fair over time. We're partners. We're going to be fair to each other. The truth is, based on every prior market precedent for a foundational new technology like AI, you've always had a bubble. Carlota Perez wrote this great book about this. Markets are efficient. They correctly understand that this is a foundational new technology. There's what Mauboussin calls a breakdown in diversity. Everyone becomes bullish on this new technology. And I am beginning to worry a little bit about a diversity breakdown.
· Gavin Baker
And then you get a bubble. That bubble funds the buildout of this new technology, but supply gets ahead of demand and you get a crash. It's a particularly severe crash if it's a debt-fueled buildout, like the year 2000. One thing that's really good about the current buildout is that it's still overwhelmingly funded out of operating cash flows, which is a really important fundamental difference versus the year 2000. As is valuation. As is the fact that every GPU is running at 100% utilization, when 99% of fiber was unutilized. There are all these fundamental differences. History doesn't repeat, but it rhymes. As an investor, we have to be very cognizant of it and recognize that based on the last 200 or 300 years — forget the internet bubble; we had a railroad bubble, a canal bubble, every kind of bubble, the South Sea bubble — we should expect a bubble. That's terrifying. Nobody wants a bubble. The reason it's terrible is, if you're valuation sensitive, you massively underperform. You get fired by probably all your clients. George Vanderheiden, who is no longer with us — a great Fidelity portfolio manager — fought the bubble in '99 and retired in early 2000 because I think he just couldn't take it. He knew it was wrong. His clients were deeply skeptical. "George, you're out of step." He had white hair. He's a truly great man. I only overlapped with him briefly, but he was a very important mentor and friend to my good friend and mentor, Jennifer Uhrig. So I have a lot of Vanderheiden DNA through her. He was the same person who said, "Being early is the same thing as being wrong." George retires because he can't take the underperformance and he can't take clients saying, "What's wrong with you? You don't get it." He has 40% of his fund in tobacco, 40% in home builders — and literally, he probably outperformed the NASDAQ by 20 or 30x over the next 3 years. I have been optimistic that this fundamental shortage of wafers, which today is controlled by Taiwan Semi, will prevent one. If Taiwan Semi did what Jensen wanted, I think Nvidia could sell $2 trillion of GPUs in '26 or '27, maybe $2.5 trillion, maybe $3 trillion. But there is a limit where consumers would consume so much, that you probably would be in an overbuild. So Taiwan Semi — if we don't get a bubble, we need to throw a party for them, because they will have single-handedly prevented a bubble.
· Gavin Baker, Patrick O'Shaughnessy
You are starting to see companies go to Intel and Samsung. [00:00:00] S0: Let's just assume TSM stays super supply-constrained versus the latent demand. What happens? [00:00:00] S1: Well, the history of markets is — I don't know who, but one of Intel or Samsung — they're not going to stay disciplined. They will break, and then at some level that will force everyone else to break. A lot of this may come down to the degree to which Taiwan Semi can maintain a lead over Intel and Samsung. You've got to remember, it's whatever it is — 9, 12, 15 months. [00:00:00] S0: The leading node edge, you mean? [00:00:00] S1: Exactly. The pace at which they expand capacity. If I were to watch one thing to understand whether there's a bubble, it's Taiwan Semi's capacity decisions. There's a Goldilocks zone where they expand enough to make it hard for Intel or Samsung to really truly emerge as an at-scale second source with something well north of 30% market share, and yet they also keep this fundamental constraint on wafers that helps us avoid a bubble. And then obviously the Terafab is going to play into this too. [00:00:00] S0: Say more about that.
· Gavin Baker
[00:00:00] S1: It's a SpaceX — I believe Tesla's involved as well — joint venture to build the world's largest fab, here in America. I think they're going to be successful. One, they have a partnership with Intel, which is very important because they're getting access to 50 years of institutional knowledge that's just 9 months, a few quarters, 12 months — 3 to 5 quarters behind the front. That's an advantage. It's also an advantage that the Terafab is going to get attention from the A-teams of all the semi-cap equipment companies. One big reason Taiwan Semi caught up is ASML and KLA-Tencor and Lam Research and Applied Materials — they wanted them to catch up. They don't like having a monopsony. The A-teams were in Taiwan working. Intel made some mistakes, and presto. So the A-teams will be here because of Elon's reputation in hardware engineering. To a degree that I think is maybe hard for people to imagine in America, where politics has replaced religion — because Elon had his foray into politics, that makes it hard for some people in America to see him clearly — which is sad because I do think he's probably doing more for America than any other American. He's single-handedly bringing manufacturing back to America, he's revived defense tech. SpaceX is in some ways the most important defense contractor in America. He's doing Starlink, which is amazing for the world. He's creating all these blue-collar manufacturing jobs, which is a goal of a lot of liberals and good for America. He's done more than any living human to decarbonize the world. And if you are upset about data centers on Earth for environmental reasons, well, here you go.
· Patrick O'Shaughnessy, Gavin Baker
[00:00:00] S0: Put them in space! [00:00:00] S1: It's sad, but he is a living deity in China, Taiwan, South Korea, and Japan. Having watched him for a long time, what he's going to do is recruit the best people, because the best engineers want to work for Elon, especially in hardware engineering. Next to the Terafab, there'll be a Taiwantown. "Oh, these are your favorite restaurants. I'm going to move them and their whole staff from Taiwan to Texas, and we're going to make everything the way they like it." And then we'll have Japantown — same thing. We're going to have Koreatown. We're going to have all these things exactly dialed to recruit the best engineers. That's just not the way that the people who run Intel and Samsung think. So he's going to have the best talent. He's going to have the A-teams at the wafer fab equipment companies. He has Intel, which is important. It's so good for any administration's political goals. And I think it's different enough that it will not alienate Taiwan Semi. [00:00:00] S0: And these have long lead times, right? Terafab is going to be pumping out whatever GPUs, whatever chips — quite a long time from now. [00:00:00] S1: We'll see. Elon tends to do things differently. Everybody else has taken 3 years to build a data center; he built one in 122 days. Samsung had to give him an office in their fab in Texas because he was so unhappy about the pace at which they were expanding and building.
· Gavin Baker, Patrick O'Shaughnessy
[00:00:00] S1: We'll see. Elon tends to do things differently. Everybody else has taken 3 years to build a data center; he built one in 122 days. Samsung had to give him an office in their fab in Texas because he was so unhappy about the pace at which they were expanding and building. [00:00:00] S0: Are you surprised by — you mentioned DeepSeek earlier. The simple reaction to that was, "OK, these models are just going to get 95% as effective for some tiny fraction of the cost. Distilled Chinese open-source models. We'll be able to use these for most of what we want to do. Fast-forward a little bit of time, 2 years from now, there's no reason I have to spend $1 million a year in my small little firm on tokens or something." But the actual reality seems quite different than this, and I'm curious why there's that dissonance in your mind.