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By Opalesque:

"I've been at this investing game a long time. Long enough to see cycles repeat themselves, cycles that I literally thought I would never again see. Yet in finance, everything repeats," writes Harris "Kuppy" Kupperman, founder of hedge fund Praetorian Capital, in his latest blog. His piece is a contrarian take on the AI boom, as he cuts through the hype with some brutal but simple math.

Kupperman, a veteran hedge fund manager who focuses on traditional metrics like cash flow and return on invested capital (ROIC), argues that the current AI investment cycle represents a massive capital misallocation bubble reminiscent of past speculative manias. Despite recognizing AI's transformative potential and using it in his daily work, he believes the economics simply don't add up.

The devastating math

The numbers Kupperman presents are stark. For 2025, total datacentre spending is projected at $400 billion, consisting of roughly 25% for buildings and land, 40% for power systems and infrastructure, and 35% for GPUs. With an average 10-year depreciation cycle, these 2025 datacentres will generate $40 billion in annual depreciation costs while producing only $15-20 billion in revenue. This means depreciation alone is double the current revenue.

The situation becomes more dire when considering profitability. Current AI services operate at essentially negative gross margin......................

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