Inside today’s Daily Journal…

Editor’s note: Porter & Co. will be closed tomorrow, Friday, July 3, in honor of Independence Day. The Daily Journal and the Customer Care team will return on Monday, July 6.

Also note that Porter’s 2029: The End of America – which continues to move up the best-seller list – is now available as an Audible book here, or to read on Amazon here.

The consensus trade of this decade is artificial intelligence (“AI”).

The hyperscalers. The data-center landlords. The chip designers. The power companies feeding them. The logic is intuitive: if intelligence is the new electricity, own the machines that make it.

But the question of whether a business is a good investment is not decided by the value of its product. Air travel, for example, is a service of enormous utility. But airlines are a terrible investment.

For a business to yield outstanding results to investors, it must possess outstanding economics. And, most importantly, it must possess a moat – a means of preventing additional capital from flooding the market and driving marginal returns to zero.

The danger for AI investors is two-fold.

First, a chip that defines the AI technological frontier becomes a discounted item in 18 months. The technology is evolving so rapidly that it has, so far, been impossible for any particular model to maintain its technological leadership. But that won’t stop the AI companies from trying. The resulting depreciation schedules and corresponding capital budgets are staggering.

But even that’s not the real problem – which brings us to the second danger. Massive investments in rapidly depreciating computer architecture could be afforded if it were possible to lock-in customers and increase prices over time. Alas, that is completely impossible. There are zero switching costs between AI models. I run two of them constantly so that I can evaluate in real time which is performing better. I spend my tokens accordingly. Not only is there no brand loyalty, there’s also a constant, real-time Pepsi Challenge going on every day.

AI is an industry that looks to have even worse economics than airlines. High capital intensity, brutal depreciation, rapid obsolescence, and zero customer lock-in. If I’m right, the worst thing for any of these businesses is revenue growth. When you’re losing money on every user, you’re not going to make it up with volume.

But this doesn’t mean that AI is going away – planes still fly every day.