Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Gavin Baker
[00:00:00] S0: This is a common criticism. How are you going to cool everything? [00:00:00] S1: I've spent a lot of time at Starbase over the years, and I've talked to a lot of SpaceX engineers. I do think it is the most talented group of engineers on planet Earth, and they're very confident they have solved this. They're not always confident. There's some engineering that needs to happen to turn Starship into a Mars Colonial Transporter. Will they do that? [00:00:00] S0: Absolutely. [00:00:00] S1: What are they more focused on? I'd say probably repair and maintenance. [00:00:00] S0: Those are the two big responses — the radiator, and how do you repair whatever issue goes wrong in the rack?
· Gavin Baker
[00:00:00] S1: And the answer is, until you have floating Optimuses, you don't. Starship is going to change the space economy in ways we cannot imagine. Particularly if regulation becomes a constraint to data centers — none of it's going to matter. You're going to sell as much orbital compute as you can make. And then obviously you link these racks using lasers traveling through vacuum, which are already on every Starlink. It's just mind-blowing to me that SpaceX operates the world's largest satellite fleet, which is 98 or 99% of all satellites in orbit. Every Starlink — they're cooling it today. Starlink V3 is going to operate at 20 kilowatts. A Blackwell rack is only 100 kilowatts. People talk a lot about density. Well, if you're connecting the racks with lasers through a vacuum, you can make the rack bigger physically. You're focused on weight, not size. In a data center on Earth where you're trying to connect racks, ideally using copper, minimize lengths — cabling is a big cost. You do want that rack to be small. Copper when you can, optics when you must. But in space, there are all sorts of things SpaceX can do that maybe some of these naysayers are not contemplating. They operate more satellites than anyone. They have a 20-kilowatt satellite today. So maybe you just scale that up to 60 kilowatts to start. They seem very confident they're going to go right to 100 to 120. The same company now also operates the largest data center on Earth. They have the world's best hardware engineers. And all sorts of people, almost all of whom are not smart enough or practical enough to work at SpaceX, are these armchair skeptics. I don't want to quote Larry Ellison, but somebody was being skeptical, and Larry was just like, "Listen, he's out there landing rockets. I don't see anybody else landing rockets." And the reality is, 10 years later, no other company is consistently capable of landing and fully reusing an orbital rocket. None of this makes sense without reusability, and that means you have to land it. I would like to redefine orbital compute as racks in space, not giant floating Pentagon-sized data centers in space. That's silly. What makes a data center is that you're connecting these racks with lasers. So it'll be racks in space connected with lasers into a virtual data center.
· Patrick O'Shaughnessy
[00:00:00] S0: If you think about that state of the world — let's say that all happens and we're really good at getting these things up economically and running — matrix multiplication all over space. What does that mean for terrestrial data centers?
· 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.