The Week: The Half-Trillion-Dollar AI Loop

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**George Hahn** (1:50)
Welcome to The Week from Prof G Media, where we break down what mattered and what it all means. I'm George Hahn and it's Friday, August 14th. Today, Nvidia's half trillion dollar bet on AI, and what a weak jobs report tells us about the economy. Then, Scott on America's declining power at home and abroad. And finally, why we're surrounded by sex, but having less of it. Let's get into it.
This week, the AI boom began to look less like a software revolution and more like a heavily financed construction project. Big Tech is spending at an industrial scale. Nvidia is helping finance its own customers, and no one can say exactly where the returns will come from.
Last Friday, Prof G Markets ran its quarterly review with Oswath DeMoteron, the NYU valuation professor. Ed calls the Dean of Valuation. His point? That investors are now holding a very different kind of company than the one they bought five years ago.

**Aswath Damodaran** (3:01)
These companies five years ago, they asked me what their invested capital was. I wouldn't even have cared because you knew that they could generate revenues and operating income with very little additional invested capital. Outside of acquisitions, even with R&D, consider these companies generated returns of 70, 80, 90 percent invested capital. The only survivor from that group is Apple, which still continues to deliver that kind of return, and analysts are not happy with it because it's not investing.
The other companies now are the equivalent of manufacturing companies. They're building huge capacity for whatever, AI products and services. And like all manufacturing companies historically, they're now going to be judged on whether they can deliver the earnings on this investment. Something they've never had to do historically.
So measures like return on investment capital that used to be not that useful with tech companies, now come into play. Questions are, are you earning more than your cost of capital? A laughable question five years ago with these companies now becomes a relevant question.

**George Hahn** (4:04)
On Monday, Scott and Ed laid out the bull and bear cases side by side. The S&P had just hit fresh record highs, but Scott pointed to a problem.
The current level of AI spending would require two and a half trillion dollars in new revenue, more than what all of big tech generates today.

**Scott Galloway** (4:27)
The problem I think we're facing, and I think what people have to be cognizant of, is the market is now six stocks, and Alphabet and Amazon alone drove nearly half of S&P earnings growth.
It feels like the metrics are overstating the positive case, if you will. And I like, to me, I think the data around the fact that things are overvalued, or the bare case, if you will, the one piece of data that I just think is very hard to argue with is that, if so much of the market is concentrated on the well-being of the prospects of AI, and the investments in these hyperscalers, we need, if you look at the capex, to get a reasonable rate of return on the current capex by the hyperscalers, we're going to need to recognize or create two and a half trillion dollars in incremental revenue from AI. Right now, the cumulative revenue being produced by AI is 150 billion. So we need it to 15x just to get to a sustainable or justifiable ROI on the current capex. I think that is unlikely. By the way, that two and a half trillion dollar number, just to put it in context, is greater than all of the revenue of Big Tech right now.