Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Gavin Baker
[00:00:00] S0: AI creating price efficiency. [00:00:00] S1: Yeah, exactly. Some of the biggest opportunities outside of these higher-quality names that I think can compound for a long time and are safe — unlike these low-quality names, which are terrifying — are in names that are miscategorized. Astera was in a lot of copper-loser baskets. Astera's biggest product is going to be a switch. You use both copper and optics to connect switches to accelerators. Definitionally, if you're a switch company or an accelerator company, you cannot be a copper loser, because you're going to be on the other side of that connection. [00:00:00] S0: I wonder if you could riff just for a sentence or two on each of the major companies — Google, Microsoft, Amazon — the major players that are public. All the conversation is centered around these exciting new companies. Maybe run through them and riff.
· Gavin Baker
[00:00:00] S1: Google was incredible last year because they had that TPU advantage, which is now gone. The reason I think they're still in a great position is they have the most compute of everyone. We talked about the value of installed bases being higher as a result of shortages — they have the biggest installed base of compute. Google I/O is this week. If they don't release something that even slightly leapfrogs OpenAI and/or Claude, that's interesting. It's not a disaster for Google, it's just interesting. It just means this Nvidia effect we discussed is even more powerful than maybe I'd imagined. But I'm very curious to see what the Pareto frontier looks like literally in 5 days after Google's announced its new stuff. This is a big card for them. But Google, between the amount of data they have — and the YouTube data is actually really genuinely valuable, and is valuable in a world of robotics. The amount of compute they have, the search business they have — Google's never not going to be in a good position. You see that with GCP going crazy. You've got to give Zuckerberg immense credit, for what he's done in terms of making Meta an AI-first company internally. He is the only one of those true internet giants to have done that. I give him a lot of credit for that. I give him a lot of credit for paying up when he did for contracts, that talent. And Muse was a really big upside surprise. It was the first model from MSL, and it's not on the Pareto frontier with xAI, Google's one entrant, and then OpenAI and Claude, but it's pretty close. That was very impressive to me. So Meta is in a better position — still not as strong of an absolute position as Google, but a better position. And rates of change matter more than level in markets, particularly over short 3-year timeframes. Over long timeframes, level of competitive advantage tends to dominate. But even within that, changes really matter. Amazon is in a really strong position because of Trainium. You're going to see real P&L efficiencies from robotics over the next 18 months in their retail business. I actually think Nova — their internal models are not where Muse is, but they're better than they get credit for. Then Microsoft — I like Satya, I admire him. He's an exceptional CEO, and I give him a lot of credit for the decisions he's made.
· Gavin Baker
But he did go from, "We're going to make Google dance," to being the product manager of Copilot in 3 years. I would love to know — during the coup attempt against OpenAI, does Satya regret his decisions? Does Satya wish he had supported Ilya instead of Sam, and that Ilya and Mira were really running OpenAI today? In his heart of hearts, I would love to know. Because the Microsoft-OpenAI partnership might look very different in that world. That's a very interesting question that we'll never know the answer to. But I give him a lot of credit. What he is doing now — he's taking risk. This goes to the decisions you have to make in that cone of uncertainty — not only how much you spend, but what you're going to spend it on. Microsoft flinched for a moment in early '25. They have this algorithm: "We spend this much CapEx dollars, we get this return." That algorithm was kind of off. If you flinch, you lose position. You lose all these allocations, and it's difficult to get them back. So they flinched. The decision Satya is making now, which the market has punished him for, but I think is the right decision — who knows how fast Azure could be growing if they were willing to just sell GPUs to OpenAI. "We're going to use our compute internally to make our own products better." One reason Copilot was so bad, or has been so bad, is that there wasn't enough compute available. They're fixing that. He's the product manager at Copilot. I do think he's a great CEO. They're trying to use their compute to train their own models. I am a little skeptical that they have the right team to succeed there, but just like Meta, they can afford to hire a different team. But he's making good decisions that are risky decisions, to position Microsoft for this world where frontier models are no longer API-accessible. It's a really courageous decision that I give him a lot of credit for. He is foregoing — Microsoft probably would be an $800 stock today if they were using their GPUs to serve solely OpenAI and Anthropic's capacity instead of using them for their own products. So I give him a lot of credit for making a great decision. What's really interesting is the degree to which these companies are outward-facing in their decisions. The two companies who are the most deeply engaged with startups are Amazon and Nvidia by a mile.
· Gavin Baker, Patrick O'Shaughnessy
Then there's a really intense engagement with Google — they're next most intense. Broadcom is engaged in a different way; they're just everybody's favorite ASIC supplier. If you're a startup, it's considered a level up if you get to work with Broadcom for your second-gen chip, and it's considered manna from heaven if Broadcom works with you for your first-gen chip. And then you see essentially zero engagement with startups from AMD, Microsoft, and Meta. When I say zero, it's a little. But I just wonder about that decision, because some of the best teams are no longer at big public companies. They're at these smaller startups. It's going to end up being a pretty big advantage for Nvidia and Amazon — with Google right behind them — to have this engagement that you just don't see from these other hyperscalers. [00:00:00] S0: As we wrap up, I'm curious for you to riff on any other out-there knock-on effects you've started to think about for this giant trend. We've talked about the specific companies in a lot of detail that this most impacts. We talked a little bit about the application layer and what would have to happen for there to be more value accruing to that layer of the stack. I'm curious about any other just fun knock-on things you've been thinking about as this world changes so quickly.
· Gavin Baker
[00:00:00] S1: It is wild that the application layer — forget value accruing, value has been destroyed. AI has net destroyed — even if you count Cursor and Cognition, the most successful AI natives — trillions of dollars of value has been destroyed by AI at the application layer. In this context, the companies that are doing the best today, that are seeing their values increase the most, that are creating economic value, are the companies with the highest effective ratio of utilized GPUs per human. Maybe this just means that every human is going to get a lot of GPUs. But that's an interesting fact we need to be cognizant of. I will just say — and maybe this is a little dark — I am more and more worried about personal safety. I worry about this a lot more for people who have a much bigger public presence and are much more associated with AI. I hope nothing tragic happens. There is this upsurge in political violence here in America. As AI increasingly becomes political, I worry that's going to get directed at more and more AI political leaders. Whatever I may think or may not think of OpenAI, I think it is terrible that someone threw Molotov cocktails at Sam Altman's house. I am worried that we are headed into a higher variance, higher beta, higher-risk world because of AI. That's for me as an individual. And then for people who are big players on the chessboard. Think about what it means geopolitically. We're watching, the Ukrainians are really starting to win. The reason they're winning is not really because they have better drones — they do have better drones, that's part of it. The reason Ukraine is really winning is they have the best battlefield AI, outside of probably America and Israel. As China, as our adversaries begin to process that — how do they respond? If the United States, because of its edge in AI — it's great if you're America, but it is destabilizing for the rest of the world. Something I think a lot about is creating a charity to just educate the world on how awesome the West has been. Slavery was endemic to essentially almost every civilization, and slavery was really ended by the British Empire. Tell that story. But America, after 1945, we had the nuclear bomb. No one else had it. We could have controlled the world forever. Instead, we rebuilt Germany and Japan. Who are America's most reliable allies? Israel and South Korea.
· Gavin Baker, Patrick O'Shaughnessy
That's a testament to the American spirit in our country. We didn't take over the world. There were these fears that were documented at the time that the American generals — MacArthur was a little bit of an American emperor in Japan — were just going to take over the world. And they could have. And they didn't. They came home, we demilitarized, and then you had this period of great global stability between — it was scary, there were terrible moments. [00:00:00] S0: Pax Americana.