Thread

Wall Street is growing skeptical of the data center boom

72 points · 87 comments · mikhael

bryanlarsen · 1790019810 · focus · HN ↗
Any data center that can remain profitable selling open source tokens at commodity prices will be fine. Any data center that relies on OpenAI/Anthropic level token prices and margins might be in trouble. After clearing their debts through bankruptcy, they'd likely be quite profitable selling open source tokens at commodity prices.
1. nomel · 1790020375 · focus · HN ↗
  I think there's still some low-hanging fruit with thin clients and colocated-to-AI applications. I don't think the math for beefy personal computers is going to hold up, for most use cases.
2. Apes · 1790020800 · focus · HN ↗
  If it costs you more to generate the tokens that the market is willing to pay for those tokens, then not even bankruptcy will save any of the costs invested in one of these datacenters.
  If the cutting edge OpenAI token prices are $80 per 1M token, and the open source tokens are $1 per 1M token, that's a huge gap of "this will never be able to make money under any scenario if the bubble bursts" that will catch a lot of these new datacenters. No one will run a datacenter that costs $5 per 1M token to sell at $1 per 1M token even if the debts are cleared.
  1. nostrademons · 1790022612 · focus · HN ↗
    The point being made here is that most of those costs are amortized capital costs, which get wiped in bankruptcy.
    That $5 per 1M token doesn't literally cost $5 per 1M token. It's more like they had to build a datacenter for $500M that can service 100T tokens over its lifetime. They did this by borrowing money on the capital markets, and now they have to pay interest to those bondholders, interest that they can recoup with their $80/1MT prices. But if it turns out they can't charge $80 and have to charge $1, they won't be able to make those interest payments. They enter bankruptcy, the court wipes the debt clean, and now they don't have to pay interest, only the actual operating costs, which may be more like 50c/1MT. The company gets recapitalized with the new owners being largely the bondholders, the existing equity holders get wiped out, and they can compete with the commodity producers now.
    Apes · 1790023340 · focus · HN ↗
    Datacenters aren't free to run.
    You have land taxes and or rent, building upkeep, staffing costs, electricity, water, hardware replacement costs.
    And new build DCs have blown all these costs through the roof justifying the decision because the price of compute is so high. When the prices come crashing down, the expenses will remain fixed where they are now.
    BobbyTables2 · 1790049631 · focus · HN ↗
    So that’s how bond holders succeed these days! (;->
    That whole thing sounds deliciously evil - I’m not even sure who to be mad at — too many to pick from.
    nostrademons · 1790094800 · focus · HN ↗
    In general the bondholders don't win unless they're holding senior secured debt. If they were expecting a return of 5% on their bonds, the fact that the company entered bankruptcy means that the profit it can generate is less than the 5% interest the bondholders were asking for. It may get recapitalized with them as the shareholders, but the profits on the new recapitalized company will be less than the interest previously owed to the bondholders, just by the fact that the company entered bankruptcy.
    The two conditions where they could win are:
    1. When they have liquidation preferences over the other bondholders. In this case, their claims come first at bankruptcy, which means they can end up owning the company at the expense of the other bondholders and stockholders. The company's overall profits might not be sufficient to generate a return at the interest rate of all bondholders, but it might generate returns over what a select group of bondholders would otherwise get.
    2. When the company can't generate sufficient profits now, but their revenues and earnings are expected to grow over time. In this case, the new equity holders would take a significant haircut on the value of their investment at the time of bankruptcy, but improving financial positions means the value of their investment could grow to be worth significantly more than the bonds over time.
    I can't rule out either of these for AI companies. The principals of many of the companies involved have a record of self-dealing that's very similar to #1 - it's illegal if it can be proven in court, but it's often very hard to prove, particularly if there are other parties involved. And the economics of AI are likely very similar to #2.
3. bix6 · 1790020948 · focus · HN ↗
  Quite profitable at commodity prices? I don’t buy that. And all of them are building with debt / equity that expects high token prices?
  1. bryanlarsen · 1790021126 · focus · HN ↗
    After bankruptcy they likely have no debt, so can out-compete those that didn't go through bankruptcy. It's the bankruptcy that makes them profitable -- it's a common pattern in nascent commodity industries.
    nemomarx · 1790021609 · focus · HN ↗
    Bad news for wall Street though if they have to go bankrupt first?
    I mean the physical hardware will be fine but the owners and investors should be worried then right
    delusional · 1790022165 · focus · HN ↗
    By the time the bankruptcies come, they'll all be owned by index funds and main street. The price will crash at the break of the bankruptcy, and wall street will swoop in to buy up the "distressed assets" at bargain bin prices.
    DivingForGold · 1790037696 · focus · HN ↗
    Yeah, Musk has cash, he will send his operatives over to make a lowball offer on bankruptcy assets ...
    georgemcbay · 1790023057 · focus · HN ↗
    > Bad news for wall Street though if they have to go bankrupt first?
    Don't worry, the already stretched taxpayer will be on the hook for everything just like in 2008!
    This time the relief mechanism is already baked into the system (capital does learn from its past mistakes, even if it may not be the lessons you'd hope for!)
    <a href="https://prospect.org/2026/08/03/ai-bailout-could-be-baked-into-bubble-private-equity-life-insurers-loans/" rel="nofollow">https://prospect.org/2026/08/03/ai-bailout-could-be-baked-in...
    jordanb · 1790022265 · focus · HN ↗
    Guess this is the logic for SPCX bond trading at junk valuations?
4. alfalfasprout · 1790021132 · focus · HN ↗
  assuming demand remains elevated and growing, maybe. But spend on AI is pretty stratospheric right now... companies are already starting to clamp down on spend. This makes you really wonder if there will be sufficient demand at current commodity prices for eg; OSS models to justify all these data centers.
  1. bryanlarsen · 1790021557 · focus · HN ↗
    Yes, I believe so. Using a sibling commenter's number of frontier models being 80X the price of commodity models, I think companies who switch will spend a minority of their savings to increase their token usage and only pocket the majority of the savings.
5. FuriouslyAdrift · 1790022530 · focus · HN ↗
  Eventually these models will get commoditized (we're already at the "good enough" stage for real work), then they will get turned into custom hardware and get 1000x faster, then that hardware will get commoditized (like DSPs) and they'll be everywhere and cost $1.
  1. binary132 · 1790050851 · focus · HN ↗
    It blows my mind that anyone hasn’t grasped that the token pricing game is a race to the bottom forever.
  2. bryanlarsen · 1790084537 · focus · HN ↗
    From a very high level view DSP's and GPU's are the same thing: highly programmable number crunchers. A better example would be Google's Tensor chip. It's not as general purpose as a DSP or GPU, it's more optimized to do inference.
    That trend will continue.
    I figure there are 6 order of magnitude events that could happen in the next decade to lower token prices:
    - more specialized / better chips
    - IC technology: smaller feature size, higher clocks, etc.
    - more efficient algorithms
    - solar power is getting cheaper at an order of magnitude per decade, batteries even faster.
    - pricing pressure from open source models
    - breaking of the Nvidia monopoly and it's 75% gross profit margin
    Maybe all 6 won't happen, but certainly a 1000x reduction in price in the next decade seems highly likely. Jevon's paradox says that the 1000x reduction in price will likely result in more spend on AI, not less.
    FuriouslyAdrift · 1790087132 · focus · HN ↗
    AMD bought Talaas specifically to make AI accelerator pieces to be embedded into generalized chips.
    At work (we're a medium sized manufacturing firm), we bought our own inference server for $107k and run Kimi 2.8 for nearly all of our use cases (and dropped our cloud AI spend to $0).
    bryanlarsen · 1790095139 · focus · HN ↗
    You dropped your cloud AI spend down to the price of capital plus the cost of electricity and maintenance on that server. When/if tokens become a commodity, the price of tokens would be the marginal cost, AKA about the same. Big when/if, though.
    FuriouslyAdrift · 1790098710 · focus · HN ↗
    At our current rate, we will break even by end of the year. Possibly quicker as SaaS rates seem to have gone up.
    And, oh yeah, our local server is much faster and more available for our 30 or so local users than the SaaS services. Win-win.
    bryanlarsen · 1790173135 · focus · HN ↗
    Yeah, the when/if in my comment is definitely not going to happen by the end of the year!
6. greyface- · 1790042091 · focus · HN ↗
  Any data center that is in the business of selling tokens rather than space, cooling, power, and connectivity is going to be in trouble eventually.

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