There’s a wild paradox in the middle of the biggest story in tech right now. The GPUs and other essential hardware that the hyperscalers are spending on so lavishly to pack into their data centers, it turns out, go obsolete in a hurry. That’s the view detailed in an excellent new report from Research Affiliates, a firm that oversees around $200 billion in investment strategies for its RAFI index funds and ETFs. Author Chris Brightman—he’s an RA partner and senior adviser—contends that the AI arms race has effectively created a new industrial era. In this transformed ecosystem, companies aren’t “investing” in the traditional sense. Rather, they are churning equipment at such an incredibly rapid tempo to generate sales that it’s changing the very definition of capital expenditures.
“They’re more like supermarkets than traditional tech or industrial enterprises, but their turnover isn’t in the likes of grocery items. It’s the stuff that generate their large language models, vector search, and other products,” Brightman told me in a phone interview. “They’re in an arms race where they need to replace their hardware very rapidly, in other words, restock their shelves in a hurry.” The problem, Brightman asserts, is that hyperscalers are taking losses on the large language models, vector databases, and other products they’re selling to companies and consumers, so the more hardware they buy, the more money they lose. “Right now, each is using AI to maintain crucial dominance in their field, and that makes sense,” Brightman observes. But, he adds, the immense spending needed to maintain those “moats” and keep rivals at bay could generate puny returns going forward, and harm their overall profitability.
