Renting GPUs avoids some risks but creates long-term exposure

Transcript

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

1. 15:30

   and all these things. We don't own capacity. We rent all the capacity so far, you know, on typically these three-year deals. And that's like a big decision. Like, should we buy? Should we, you know, or should we keep renting? I'm actually like, not like mega dogmatic about it. I think renting is nice because there's a certain amount of capital efficiency to it. If you're buying, you know, like, I mean, first of all, there's an obvious like operational complexity of it.

2. 15:56

   Like you have to, you know, deal with vendors and suppliers. and, you know, power and cables and all kinds of stuff. But there's also, you know, financial complexity to it. Like, how do you fund it? Like, should you raise equity, you know? And you can raise a billion dollars and go buy hardware for it. That's a very diluted way to do it. You can raise debt, but, you know, if you raise debt, you know, you typically want to have, like, locked-in long-term revenue to pay the interest rates.

3. 16:22

   So that's also not trivial. But, you know, like, we look at the economics, We look at the operational complexity, we look at the risks. It's a complex trade-off and we're open to buying. There's other constructs too. To get the capacity we need for 2027, it's going to take a lot of work on going a lot of different avenues to lock it up. So do you have to hire a lot of finance people to do all this stuff or not really?

4. 16:52

   I've had to spend a lot of time on this and we've had to spend a lot of time on this. And I do think over time, I mean, there is a lot of, you know, these are very expensive assets, the hardware. And, you know, I think, I mean, it's kind of staggering. You're starting to see like AI investments starting to become like several percentage points of GDP of the U.S. and, you know, starting to see like interest rates in America shooting up in the last few weeks.

5. 17:17

   And I mean, like at this stage, like, you know, and you go and look at the neoclots, like these are very, very sophisticated financial engineering companies. And so, yeah, we look at that and, you know, we look at all the options and it's possible we might have to do similar things ourselves. I wouldn't want to, like, I would rather focus on being, you know, like a very lean software company, like doing the things we're good at.

6. 17:40

   I don't think it's good in general for software companies to own hard assets, you know, in the same way as like, should you own your office? Like, I don't think that's necessarily the right solution for most companies. But of course, like in order to get the capacity we want, like, you know, everything's on the table. Yeah, and I guess the supply is going to be constrained for a while, so you kind of have to do that.

7. 18:03

   Like, do you agree with that? Or do you think this is just like a moment in time? I don't necessarily agree with that. I mean, like, NVIDIA is delivering, you know, several hundred thousand black walls, you know, a month, right? And I don't want to say, like, the market is, like, 100% efficient, but, like, you know, in general, like, if you're willing to pay a high price, you can get GPU capacity, right?

8. 18:23

   Like if you're willing to pay more than everyone else and of course, Anthropic and OpenAI is buying up as much as they can. But fundamentally, like there's constantly supply coming on the market. And so I don't necessarily think it's like a fully cornered resource. Prices are going up. And I do think it's worth kind of reflecting on that as like the normal state of hardware is like, it's like kind of like gravity, like eventually hardware prices always go down.

9. 18:47

   So we're a little bit in like a weird sort of period of time where like hardware prices are going up and you know it's hard to say you know how long this is going to last you know could be another six months could be another 36 months like it's really hard to know how long and but but i fundamentally don't know if like it's true to say like you know you need to buy capacity in order to me that's a little bit sort of almost like the great toilet paper shortage of you know the pandemic or whatever right like you know at least this like you know run on the bank type situations and but that being said like you know capacity is going to be tight for a while and and you know prices are going up and you know luckily i think you know it's not even necessarily bad for us if prices go up because because you know scarcity it also

10. 19:30

    means like we can charge more from our customers and and you know and the fact that we have a lot of reservations locked in at a rate means like to some extent we're effectively like long gpu prices already. So I don't necessarily worry too much about prices going up. I do worry more about actually prices collapsing. I don't think that's going to happen anytime soon. But I think that would be a quite bad thing for a lot of the players in the market. Why would that be bad?

11. 19:54

    I think it would be bad for anyone who's locked in a lot of supply. Yeah, because they paid way too much. They paid too much. So there's a risk of buying at the top, right? And again, I don't worry about that that much. I don't think it's going to happen anytime soon. But like I said, hardware prices in the very long run, they tend to go down. And so it's worth reflecting on that. Right now, I think your capacity is constrained.

12. 20:23

    And that leads to, in economic terms, there's a scarcity rant, right? Who captured the scarcity of rent? I think that primarily goes to two places, mostly NVIDIA, of course, but also to some extent, NeoClouds. NeoClouds, in general, anyone owning capacity has better economics. That's undeniably true today with capacity being constrained. Long term, in the very long run, I don't think that's necessarily entirely true.

13. 20:52

    There's always going to be a little bit of a premium you can get from owning GPUs, but is it worth the risk? Is it worth the risk holding these very expensive assets on your balance sheet? I'm not so sure. But we're going to see. It's going to take a few years to get through this. And in the long run, we might own some. We might rent some. Maybe a combination. Maybe do some other crazy stuff. Joint ventures.

14. 21:13

    Who knows? Maybe some complex SPVs or whatever.