Invest Like the Best with Patrick O'Shaughnessy
00:13:44 · Gavin Baker
[00:13:44] S2: No, but the time before that about kind of the risks of a blackwell air pocket. Oh, yeah. Where you're spending hundreds of billions of dollars on blackwells. They're mostly being used for trading initially. Trading doesn't generate a return. This could be a risk. We actually really saw that in the first quarter. I think one reason to the podcast two months ago, I got comfortable with that risk was just that you were seeing such incredible things out of Anthropic. And then it's like, okay, well, the market's kind of gonna look past this, and it did look past it in April, in May, in June, and then in July because of this kind of confluence of things, stopped looking past it. Just as the operating cash flow started to really accelerate, and this is just a fact, it is accelerating at big scale. You know, like Microsoft, they brought on a huge slug of capacity in the month of June that didn't even show up In the second quarter. So essentially what this all comes down to is, do you believe that the quantitative demand signals Seeing on the ground here in Silicon Valley, from private companies, are going to continue, such that the installed base of compute re-prices higher as contracts roll off, operating cash flows go up, and you can fund most of this out of operating cash flows, maybe all of it. Like if it re-prices at current rates. You could probably fund all of it for the next several years. It has been a very unusual episode in the market. We should talk about what the fundamentals are that are getting better that I'm talking about. Technicians would say it's actually in '22, okay, the market is worried about a recession, rates going up, inflation, that's what the market was worried about in '22. You knew exactly what it was, okay, DeepSeek, you know what it's worried about. Liberation Day, you know what it's worried about. There's something very clear. And in, in a weird way, that's comforting. It is, sure. And here, you know, we talked about a lot of specific things, but it just feels all those specific things, with the exception of credit, are just kind of ridiculous. And so the fact that it is still going down, a technician would say, "Hey, that's, that's a little scary." But it's definitely the bullet you don't see that gets you.
00:16:04 · Gavin Baker, Patrick O'Shaughnessy
You know, I think we've talked before about how, like, I think the three most important words in investing aren't margin of safety, but I don't know. But just, you've been out here for two months, I've been out here, I literally spoke to a company this morning who rented a cluster of several, and this is one of the second- See as startups that people wanna be in business with, and they had rented a cluster of several thousand blackwells, and we'll just call it somewhere in the mid two dollars per GPU hour. They're renting the exact same size cluster, essentially identical in every way, B200, no differences, and they're hoping seven months later to pay just under four dollars today. Like that's pretty crazy, because again, you would expect a really gentle decline in prices would be bullish. Instead, we're up, depending on the starting point, fifty to sixty percent in six or seven months. There have been so many anecdotes like that. Like I think one of the Infras Clouds, I think it was based in, I'm not sure, they went on a podcast and they essentially said, "We are planning to pay one hundred percent more for Blackwells when our contract expires." And that just means that essentially all the hyperscalers are under-earning. My main kind of mission out here this week is like, [00:17:23] S0: pressure test. [00:17:24] S2: Yeah, yeah. Tell me something negative. Like, you know, the question I asked you, is there one negative quantitative metric you've heard has been what I've been asking everyone?
00:17:24 · Gavin Baker, Patrick O'Shaughnessy
[00:17:24] S2: Yeah, yeah. Tell me something negative. Like, you know, the question I asked you, is there one negative quantitative metric you've heard has been what I've been asking everyone? [00:17:35] S0: The main thing people are saying is the third-party data suggests that the anthropic curve started to go off of its trajectory a little bit. That's like the only thing that I- I [00:17:43] S2: think that may very well be true, but then you- We have OpenAI and open source massively accelerating, yeah, the competition, and if you look at the sum, it isn't accelerating. Like I think open source is a little bit of, um, you know, they talk about dark matter in the universe, like open source is kind of dark matter to the public markets It's hard for public markets to measure it, but like if you just track what these inference clouds are saying, people saying things on podcasts or people saying things in meetings, they're not audited financials. Demand is clearly accelerating, which makes sense, 'cause you had this huge capability leap with GM five point two and KVK three, which I think we're gonna see continue. I think you're gonna see Nvidia bring Neutron steadily closer to the frontier. But man, it has been a humbling, challenging month, and but just, it's also like, wow, I've kind of pressure tested every assumption. The underlying fundamentals are improving. Nvidia is actually, as we record this, at its lowest forward PE of the last ten years. Crazy. The only time the cibes have been cheaper were Liberation Day, DeepSeek, those were kind of V bottoms.
00:17:43 · Gavin Baker, Patrick O'Shaughnessy
[00:17:43] S2: think that may very well be true, but then you- We have OpenAI and open source massively accelerating, yeah, the competition, and if you look at the sum, it isn't accelerating. Like I think open source is a little bit of, um, you know, they talk about dark matter in the universe, like open source is kind of dark matter to the public markets It's hard for public markets to measure it, but like if you just track what these inference clouds are saying, people saying things on podcasts or people saying things in meetings, they're not audited financials. Demand is clearly accelerating, which makes sense, 'cause you had this huge capability leap with GM five point two and KVK three, which I think we're gonna see continue. I think you're gonna see Nvidia bring Neutron steadily closer to the frontier. But man, it has been a humbling, challenging month, and but just, it's also like, wow, I've kind of pressure tested every assumption. The underlying fundamentals are improving. Nvidia is actually, as we record this, at its lowest forward PE of the last ten years. Crazy. The only time the cibes have been cheaper were Liberation Day, DeepSeek, those were kind of V bottoms. [00:18:57] S0: And that means to you just that the market thinks they're significantly over-earning?
00:18:57 · Patrick O'Shaughnessy, Gavin Baker, S3
[00:18:57] S0: And that means to you just that the market thinks they're significantly over-earning? [00:19:01] S2: Yeah, the market 100% thinks they're significantly over-earning. And you, we need to be humble. Maybe they are. Maybe they are. But like my kind of mission out here this week was to look for negative data points as hard as I could. I normally come to Silicon Valley, and, you know, there's a mixture of, "Here's something negative, here's something positive, da da da, unbalance is positive, you know, tech, it creates value over time." But I haven't been able to find one that is like a quantitative metric, that anthropic third-party data. I would say that seems to be hotly contested by the end. By the Anthropic [00:19:40] S3: shareholders who are, who are chopping at the bit to tell you what they know, but are also very scared they're not gonna get an IPO allocation if it gets back to the company that they're the ones who said, "Actually, things are great," you know? You can just see Anthropic shareholders like, they wanna be like, "It's not true!" You [00:19:58] S2: know? It's hard for me to believe that open source and open AI have accelerated to the extent they did, but yeah, Anthropic is clearly in the pole position. And oh, by the way, Grok and Also, you can see from third party data, like July was a pretty transformational month with Grok four point five, Grok builds coming out. So it has been a tricky month, and I have a friend, I have a friend at Finality, who just says the way to have navigated the last three years is just do the dumbest, most
00:19:58 · Gavin Baker, S3, Patrick O'Shaughnessy
[00:19:58] S2: know? It's hard for me to believe that open source and open AI have accelerated to the extent they did, but yeah, Anthropic is clearly in the pole position. And oh, by the way, Grok and Also, you can see from third party data, like July was a pretty transformational month with Grok four point five, Grok builds coming out. So it has been a tricky month, and I have a friend, I have a friend at Finality, who just says the way to have navigated the last three years is just do the dumbest, most [00:20:31] S3: superficial thing as quickly as possible and just cycle between them. [00:20:36] S0: What is that now?