Payback period is the key data-center risk metric

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 40:22

   Can I make one last point on the whole data center thing? Please. So there's one metric. The more I think about it. the one metric I would really keep an eye on is payback period. To me, that's like the North Star metric here. So CoreWeave says that its payback period is 2.5 years. Their typical deal is five years. They pay back within 2.5 years. SpaceX, they pay back in roughly one year. That makes sense because I think that SpaceX is monetizing at about $50 billion per gigawatt and CoreWeave at about $20 billion per gigawatt. And the reason for that is because SpaceX is basically getting spot. They're doing these deals that can be canceled by either side within 90 days. So they're basically getting spot minus 90. Whereas CoreWeave is signing up for five-year commitment.

2. 41:06

   So it's contracted way in advance, and they're kind of getting this contracted price. And what's happened, I think, over the past year is that spot has moved way up. Because again, of the scarcity, right? And the demand is so off the charts. So in any event, payback period is really critical. And as long as the payback periods are really short, I don't see how these companies can lose, or at least you'd have to be really incompetent to screw it up, right?

3. 41:32

   Like, you're making these big capital investments, but if you're getting your money back in one year or two and a half years, you know, that greatly reduces the risk, right? It's like owning an Airbnb in Paris or something. Well, it's just a very rapid- Like, the payback period is so quick for these if you got your orders in early. Yeah, and that means you're paying back the debt quickly. And so the debt's rolling over more quickly. It just reduces everyone's risk. Now, if that payback period starts taking longer and longer, then I get nervous, right? Because that magnifies the risk. It also means the economics aren't as good. And the question is, well, why would that payback period take longer? And it could happen for a bunch of reasons, right? Like if the demand goes down, and so now the offtake's not as good, the spot price goes down.

4. 42:13

   going down. Or just there's execution problems, right? It takes you longer to get the capacity online. So the payback gets delayed. There's a lot of reasons why payback could take longer and longer. But as long as payback remains as short as it is today, to me, that would be the one metric I would really keep an eye on. The other thing that the big offtakers will make you sign up for is what's called liquidated damages. There's really, really complicated language and penalties that are extreme about what happens when you can't service the data center. So I think that's another risk. There's been a couple of these guys that have lost, I'm not going to name who they are, but that have lost their investment grade wrapper from the big boys, because they just up sacks to your point and couldn't manage the data centers because the complexity is going up

5. 42:53

   and the complexity goes up because the chips run hotter, there's more energy, there's more electricity. So all I'm saying is, I think the sharps may be wrong. And they usually are wrong when they're buying these credit defaults. But when your expected value is a coin flip in a five-year window, that's like scary town, I think. That needs to get managed very precisely. I would