Ed Zitron (14:54)
We are in the midst of one of the darkest forms of software in history, described by many as unwanted guests, invading their products, their social media feeds, their bosses, empty minds, and resting in the hands of monsters. Every story of AI's success feels bereft of any real triumph, with every literal description of its abilities involving multiple caveats about the mistakes it makes or the incredible costs of running it. Generative AI really exists for two reasons to cost money and to make executives look busy. It was meant to be the new enterprise software and the new iPhone and the new Netflix all at once a panacea where the software guys pay one Hardware guy for GPUs to unlock the incredible value creation of the future. In many ways, generative AI was always set up to fail because it was meant to be. Everything was talked about like it was everything. It's still sold like it's everything. Yet for all the fucking hype, it comes down to two companies, OpenAI and and Nvidia. And Nvidia was for a while, living high on the hog. All CEO Jensen Huang had to do every three months was say, check out these numbers and the markets and business journalists would squeal with glee even as he said stuff like the more you buy, the more you save, in part tipping his head to the very real and sensible idea of accelerated computing. But framed within the context of the cash inferno, that's generative AI, and it all seems kind of fucking ludicrous. Huang's showmanship worked really well for Nvidia for a while, because for a while the growth was easy. Everybody was buying GPUs, Meta, Microsoft, Amazon, Google, and to a lesser extent, Apple and Tesla made up 42% of Nvidia's revenue, creating, at least for the first four, a degree of shared mania where everybody justified buying tens of billions of dollars of GPUs by saying the other guy's doing it. This is one of the major reasons the AI bubble is happening, because people conflated Nvidia's incredible sales with interest in AI, rather than everybody buying GPUs at once. Don't worry, I'll explain the revenue side a little bit later. We're here for the long haul. Sit down, get comfy. You're going to need to be Anyway Nvidia is now facing a big problem that the only thing that grows forever is cancer. On September 9, 2025, the Wall Street Journal said that Nvidia's wow factor was fading, going from beating analyst estimates by nearly 21% in its fiscal year Q2 2024 earnings to scraping by with a pathetic measly 1.52% beat in its most recent earnings, something that for any other company would be a good thing because they made so much money. But framed against the delusional expectations that generative AI has inspired, well, the figure looks nothing short of ominous. I quote the Wall street journal already, Nvidia's 56% annual revenue growth rate in its latest quarter was its slowest in more than two years. If analyst projections hold, growth will slow further in the current quarter. In any other scenario, 56% year over year growth would lead to an abundance of Dom Perignon and Huang signing hundreds of boobs. But this is Nvidia, and that's just not good enough. Back in February 2024, Nvidia was booking 265% year over year growth, but in its February 2025 earnings, Nvidia only grew by a measly, pathetic, disgusting 78% year over year. I'm being sarcastic, of course. It isn't so much that Nvidia isn't growing, but they're to grow year over year at the rates that people expect is insane. Life was a lot easier when Nvidia went from $6.05 billion in revenue in Q4 fiscal year 2025 to $22 billion in revenue in Q4 fiscal Year 2024. But for it to grow even 55% year over year from Q2 FY 2026, I'm just going to truncate that now, which was $46.7 billion, to Q2 2027, that would require them to make $72.385 billion in revenue in the space of three months, mostly from sell up about 88% of its revenue. Just want to be clear there. In a year they would have to make $72 billion just selling pretty much GPUs and the associated hardware in the space of three months. It's insane. This is really. It's too much. It's too much to expect. And this, by the way, would put Nvidia in the ballpark of Microsoft, who made $76 billion in their last quarterly earnings, and within the neighborhood of Apple, who made $94 billion in their last quarter of earnings. And they would do this predominantly making money in an industry that a year and a half ago barely made the company $6 billion in a quarter. And the market needs Nvidia to perform. They must. They must, as the company makes up 7 to 8% of the value of the S&P 500. It's not enough for Nvidia to be wildly profitable or to have a monopsony on selling GPUs, or for it to have effectively 10x their stock in a few years. No, no, no. More, more, more. Always more. Number must go up. It must continue to grow at the fastest rate of anything ever. Making more and more money. Selling more and more of GPUs to a small group of companies that immediately start losing money the moment they plug them in. It's not brilliant, is it? While a few members of the Magnificent Seven could be depended on to funnel tens of billions of dollars into a furnace each quarter, there were limits, even for companies like Microsoft, which had bought over 485,000 GPUs in 2024 alone. To take a step back about how people actually make money from buying these GPUs, companies like Microsoft, Google and Amazon make their money by either selling access to large language models that people incorporate into their products, renting out servers full of those GPUs to run inference. The thing to generate the output or train AI models for companies that develop and market their models themselves, namely Anthropic and OpenAI with some smaller competitors that don't really matter that latter revenue stream, renting out GPUs is where Jensen Huang found a solution to that horrible eternal growth problem. The NEO cloud, namely companies like CoreWeave, Lambda and Nebius. Now, these businesses are fairly straightforward. They own or lease data centers that they then fill full of servers that are full of Nvidia GPUs, which they then rent out on an hourly basis to customers either on a per GPU basis or in large batches for large customers who guarantee they'll use a certain amount of compute and sign up for a long term agreement for so more than an hour at a time. Couple years, perhaps these larger commitments A NEO Cloud is a specialist cloud compute company that exists only to provide access to GPUs for AI, unlike Amazon Web Services, Microsoft Azure and Google Cloud, all of which have healthy businesses selling other kinds of compute with AI, as I'll get into later, failing to provide much of a return on investment at all. It's not just the fact that these companies are more specialized than say, AWS or Azure. As you've gathered from the name, these are new, young, and in almost all cases incredibly precarious businesses, each with financial circumstances that would make a Greek finance minister blush. That's because setting up a NEO Cloud is expensive, even if the company in question already has data centers, as Core Weave did with its cryptocurrency mining operation. AI requires, as I said, completely new data center infrastructure to run and cool the GPUs. And those GPUs also need paying for. And then there's the other stuff I mentioned earlier, like power, water and the other bits of the computer cpu, motherboard, blah blah blah blah blah. As a result, these Neo Clouds are forced to raise billions of dollars in debt, which they collateralize using the GPUs they already have, along with contracts from customers which they then use to buy more GPUs. That's right, they buy GPUs from Nvidia, they raise debt on those GPUs, and then they use that debt to buy more GPUs from Nvidia. It's enough to drive a man insane. Corewave, for example, has $25 billion in debt on an estimated $5.35 billion of revenue in 2025, losing hundreds of billions of dollars per quarter. Now you know who also invests in these NEO Clouds, you'll never guess. It's Nvidia. Nvidia is also one of CoreWeave's largest customers, accounting for 15% of its revenue in 2024, and just signed a deal to buy $6.3 billion of any capacity that CoreWeave can't otherwise sell to someone else through 2032, an extension of a 1.3 billion DOL by the Information. It was also the anchor investment in Corweave's IPO, about $250 million. Nvidia is currently doing the same thing with Lambda, another NEO Cloud that Nvidia invested in, which also plans to go public next year. Nvidia is also one of Lambda's largest customers, signing a deal with it this summer to rent 10,000 GPUs for $1.3 billion over four years. In the UK. Nvidia has also just invested $700 million in N scale, a former crypto miner that has Never built an AI data center, having no experience, committed $1 billion and or 100,000 GPUs to an OpenAI data center in Norway. On Thursday, September 25, N Scale announced that it closed another funding round with Nvidia listed as the main backer. Although it's unclear how much money it put in, it would be safe to assume it's probably at least $100 million. Nvidia also invested in Nebius, an outgrowth of Russian conglomerate Yandex and Nebius provides through their partnership with Nvidia, tens of thousands of dollars of compute credits. The company's Nvidia's Inception startup program Look, Nvidia's plan is simple. Fund these Neo Clouds. Let these Neo Clouds load themselves up with debt, at which point they buy bunches of GPUs from Nvidia, which can then be used as collateral for loans along with contracts from customers, allowing the Neo clouds to buy even more GPUs from Nvidia. It is just that simple. It's infinite money, right? Just money. Me money. Now you fund the company, the company buys from you, you fund them again. They've used the thing they bought to buy more from you. Unlimited money. Except that is for one small prop them. These companies, don't they? They don't really appear to have that many customers and they don't appear to be making much money.
