NVDA GTC, M&A Wiz / Goog $32 B Deal, April 2 Tariff Uncertainty; Huawei Belt & Road; ChatGPT

Quoting BG2Pod with Brad Gerstner and Bill Gurley:

Market Uncertainty and Impact

The market’s uncertainty, economic and technological, drives up discount rates and risk premiums.
This leads to lower multiples and market corrections, particularly in the tech sector.

Transcript: Brad Gerstner Stuff going on with regard to Invest America on Capitol Hill and at the White House that I’m thrilled about. The pace of AI, the pace of these changes coming out of Washington, a lot of which I think is really fantastic. But it’s certainly unsettling the markets. And then the last couple of days, I’ve been down at GTC, the big NVIDIA developer event. While there’s a lot of uncertainty in the world, you know, I’m super bullish on where all of this is headed. And this is one of those moments at times where I just feel like you have to hold these two competing, but simultaneous truths that things really are accelerating and that we’re getting Ourselves in a position for this period of, you know, the golden age. But, you know some of this caution is warranted in the short run as we try to figure out how it all unfolds.

Bill Gurley And for those that listen to us regularly, they’ll know that many months ago, you expressed this concern that some of the changes were going to create disruption in the financial markets And that you were getting more cautious. And that played out, I guess everything moves fast these days, but that played out extremely quickly. And so the markets have corrected the MAG-7. I think the cover of Barron’s had the list of the MAG-7 and how down they all are. And so, yeah, I mean, anytime you get a correction, then people immediately want to know now what, right? And so did, has the air come out that you expected and now it’s something different or do you remain cautious?

Brad Gerstner I think that was like on February 4th or February 6th, we did that pod and I said, you know, well, I think the golden age will come that first we have to go through this golden age of uncertainty, Right? That we had kind of maximum political uncertainty, maximum economic uncertainty, maximum technological uncertainty that causes discount rates to go up, causes risk premiums to Go up, causes multiples to come down. And the first leg of that, I think the NASDAQ’s down about 10% since that moment. I think a lot of the components of the NASDAQ are down much more, 20%, 30% since that moment. And I think that’s just the gas of uncertainty being let out. And just in the last week or so, Bill, we started rolling over to the second potential leg of concern, which is fear of recession and growth. And so what I would tell

Restructuring Globalism

The current administration aims to restructure globalism, addressing the hollowing out of the middle class.
This involves intentional disruption through tariffs and industrial policy, causing short-term market uncertainty.

Transcript: Brad Gerstner Now, let’s talk about kind of what we’re hearing out of the administration and the other side of that. You know, I think one of the keys that people have to get their head around is this administration has a principled view about restructuring globalism. This is that uncertainty, the political uncertainty I was talking about. J.D. Vance gave this incredible speech yesterday, Bill, at the American Dynamism event that Andreessen puts on in Washington. And there were two things he pointed out. He called them the two conceits of globalism, right? And he said, this is the reason we have to have tariffs and we have to restructure the world. The first one that he talked about was that he said, there was this view in the United States that we would just whack up the world. We would do all the high-value stuff, and then places like China would do all the low-value stuff. But of course, they start with manufacturing. Then it moves to precision manufacturing, and then it moves to design. And before you know it, BYD is designing a better car, and CATL is designing a better battery. And their vertically integrated supply chain around semiconductors no longer is dependent upon NVIDIA for inference. Now they’re running inference at DeepSeek on the Ascend 910 produced by Huawei. And so that was the first thing that he pointed out. And the second thing is he said cheap labor is fundamentally a crutch to innovation. And so that the United States has not innovated and industrialized the way that it should have. So my point here is that when you think about the administration’s policies that is causing some of this uncertainty, right, this is very intentional, right? Scott Bessett, our treasury secretary, calls it the American detox period, right? That we need to reset the fiscal and monetary balance in the United States and that there’s going to be some short-term pain for longer-term gain.

Comparative Advantage vs. Tariffs

Bill Gurley remains a proponent of comparative advantage, highlighting global poverty reduction through existing trade.
He expresses skepticism about the effectiveness of tariffs and re-industrialization efforts.

Transcript: Bill Gurley You have any insight into that or a perspective on where that lands? Because I mean, obviously, everyone’s talking about this, but there’s a big question as to whether Trump’s negotiating or not. And so will the will the will the bark be worse than the bite and does what lands is simpler and less disruptive than maybe what was broadcast at the beginning?

Brad Gerstner Well, so I have two strong points of view on that. One is, this is not a negotiating tactic by Trump. I think that diminishes the administration’s principled approach to restructuring globalism. I mean, you really have to listen to the speech that Vance gave yesterday. Did. Whether it’s Besant, whether it’s Howard Lutnick, they have a fundamental view that the middle class was hollowed out by effectively sending all of this labor offshore. They want to re-industrialize America. And so this is not just a negotiation to try to get a little bit more. In that light, Bill, when you think about the tariffs coming on April 2nd, they have said there’s about 15 countries. They’re going to outline country by country what they call them. I think I heard Besant call them the terrible 15. Country by country, the trade and the non-trade barriers and what that totals, right? Is it $1 trillion? Is it $2 trillion? They expect a lot of those countries to come to the table. They said some of them have already come preemptively to try to cut a deal. Some of them will come after the fact to try to cut a deal. So I don’t see, like if on April 2nd, we’re going to lay this out, I don’t see how that can be the end. It feels like a lot closer to the beginning to me of a negotiation than it feels like the end of a negotiation. But I think, you know, there are going to be a lot of things made clear. Like one of the things we’ve talked about, are there going to be tariffs on semiconductors? There’s a good argument not to tariff semiconductors because we’re in an AI race. Why make it more expensive for U.S. Companies? But at the same time, if you just look at re-onshoring American manufacturing, you would probably say we need to put some tariffs on the import of semiconductors to incentivize the Domestic building of semiconductor manufacturing supply chain.

Bill Gurley Yeah, I will tell you for what it’s worth. And, you know, I’m always open to changing my mind later and would love, you know, perhaps to be proven wrong so that I could adopt a different perspective. But I remain, based on all the learning I’ve done to this point in my life, a big believer in comparative advantage. And I also think that there are people around the globe that want to work harder for less money than people in America do. And they have the ability to improve their life on a percentage basis from a standard of living or that kind of thing, a wellness perspective, more than someone would hear for the same Marginal effort. And I think because of that, you know, water runs downhill and that’s where those jobs want to go. And pulling up, pulling up the wall, I mean, I’ve said some of this stuff before, but pulling up the wall, I don’t think it’s going to work. I don’t think there’s anybody that wants to build a $40 microwave in America. And I look at the competition in the auto market where China now has, what, 35% of the global market, and they’re producing better cars faster. Like, I don’t – like, does anyone really expect GM and Ford to reorient themselves overnight? And I don’t even think they could because of the presence of the labor union. So I don’t, I don’t know. And you and I have talked about Morris Chang’s comments about, you know, why he went from Texas Instruments to Taiwan. And, you know, I guess one day maybe we get to full automation and that’s a completely different world. But even if that’s what you’re encouraging in the U.S., it doesn’t bring the employment back. It just brings automation here, which has some value. But that’s the part that I think is a little between JD’s two main points. One of them, like vilified the loss of jobs, but I don’t think the approach brings the jobs back. He’s talking mostly about innovation and was a little derogatory towards cheap labor, which I don’t think is the appropriate way to look at people that are trying to hustle their way Up the ladder.

US-China Relations

European leaders are increasingly frustrated with the US, potentially leading them to trust China more.
This shift could strengthen China’s position globally and undermine US interests.

Transcript: Bill Gurley And she’s based in the UK, obviously, but covers all of the globe. She said the attitude amongst the European leaders is so kind of angry and chafed that there’s a likelihood they may come to trust China more than the US. And I just think that’s an important reality to consider. That may be happening anyway, if you look at BYD sales into Europe and that kind of thing. But boy, talk about picking a fight you didn’t want. That would create the opposite of everything we’re talking about.

Brad Gerstner I think for every one of those, I see an

Google Acquires Wiz

Google’s acquisition of Wiz for $32 billion signals a potential revival in the M&A market.
This deal, at over 30 times forward revenue, highlights the strategic importance of cloud security.

Transcript: Brad Gerstner But let me shift gears here, Bill, because this is right in your wheelhouse, something we’ve been talking a lot, which is the M&A environment in the United States, the IPO market environment In the United States. And we get a blockbuster deal announced this week that Google has announced to buy Wiz for $32 billion all cash deal. Of course, most people know what Wiz is. It’s in the cloud security area, which is a huge growth area. They basically are monitoring your company’s workloads that are occurring in AWS, GCP, Azure, et cetera, and what code can be deployed on those platforms. Rumors are that they’re going to do something like a billion dollars in ARR in this calendar year. Yeah. And so if you look at it, $32 billion, it looks like they’re paying something just over 30 times forward revenue for the business. I think the business is probably close to break even. I don’t exactly know where that is. Google’s total cloud revenue is about $45 billion. So when you look at this, this is about a billion on 45 or you’re buying basically 2% growth. It certainly is not coming cheap considering that Google trades at, you know, five times revenue versus these guys at 30 times revenue. They clearly think it’s strategic to their business. But the more interesting thing, you know, I tweeted this week and said on CNBC last week, the M&A market is back. People, they called them off the beach. The corp dev teams are back in the office. They’re looking for deals. And this one is going to be a key litmus test for this administration. So talk to me about what you’re thinking about from the logic of the deal perspective and what this may or may not tell us about the business environment folks are entering into with this New administration.

Google’s Strategic Rationale

Google’s Wiz acquisition makes sense given EU pressure limiting acquisitions in core areas like search and AI.
Enterprise cloud security offers differentiation for Google against AWS and Microsoft.

Transcript: Bill Gurley Yeah. And those are both important topics. And clearly the backdrop, to remind everyone, it’s been really slow going for M&A, particularly with the perspectives that were held during the Biden administration, as well as the IPO market, which we’ve frequently talked about. And so anything that starts to open that up would be seen as a huge, huge positive data point for the venture market. I thought a lot about this with respect to Google. And I think in order to understand it, you have to put yourself in the place Google’s in. So huge, huge market cap, top five in the world, clearly has been successful with acquisitions in the past. YouTube, Android came through an acquisition. So a company that’s been successful at acquisition and a huge, you know, if they wanted to buy something with stock, they could easily do that too. But where can they spend it? And there’s massive pressure from the EU, as you noted. It’s very unlikely they would allow to be anything that relates to search, maybe anything that relates to AI, anything that relates to YouTube. So those may be all off the table. And you say you’re on the board or you’re on the M&A team at Google. Which of our businesses would we be allowed to acquire in? And enterprise is one where they don’t have dominant market share. AWS did. It’s a more competitive environment with Microsoft and others. And you probably could get something done here. And so I can’t prove that’s how they got to this place, but my guess is that that’s how they backed into saying, well, we should acquire something in this space. Within that space, you know, you say, how could we differentiate ourselves? And, you know, AWS was first. I think AWS is considered a little more developer friendly. They kind of started in that place from the very beginning. They’ve been more flexible and open in what they offer. You know, Microsoft, I think, mostly leverages their corporate customer base and kind of uses that to drive their business. So, Google, how can they differentiate? Security, especially in a distributed world, seems like a very reasonable answer to that question. And so I guess, you know, to put it all in perspective, watching all that, it makes a lot of sense that they would come to this place. Now, they’re still saying it might take until next calendar year to get this done. And I think they put up a $3.2 billion breakup fee that they lose if this doesn’t get approved. So it’s not like this is easygoing. I remember when they tucked in Waze in 90 days. Like even this is difficult, but I can very easily see how they got to this place.

Wiz’s Rapid Growth

Wiz, founded in 2020, achieved a $32 billion valuation in five years, highlighting rapid value creation.
Brad Gerstner recounts Altimeter’s loss in a similar investment with Lacework, emphasizing the competitive landscape.

Transcript: Brad Gerstner Well, I mean, I will tell you this. I hear it from every single company I’m talking to. They’re going to be watching this one very closely because people want to get back to the M&A game. And basically, there’s been no M&A over the course of the last several years. You know, we certainly – area I want to cover here is, you know, just the pace at which we’re building monster companies, right? Hat tip here to Shardle Shaw at Index, to Doug Leone for another legendary investment. You know, this is a business that was started in 2020, okay? And they’re selling it five years later for $32 billion, $32 billion, one of the largest outcomes in the history of Silicon Valley. And those guys are both repeat offenders at home run, power law outcomes. So hat tip to both of them. Green Oaks was in this. And listen, Bill, I’ll share a little vulnerability here about Altimeter and myself, because I’ve talked a lot about the search. What can we learn from search as we go to invest in these model companies? And I say, think about all the people who got Lycos and AltaVista and all these logos. They were right about the internet. They were right about search and they didn’t make any money. And all the money went to Google. Well, this is a case where Altimeter was an investor with Sutter Hill in a company called Lacework. Right. Right. And it was competing in a very, very similar space. This was the thesis of Lacework. Lacework raised a lot of money, too much money, I would argue, at the time. And they went hard at go-to market, but they didn’t have the product market fit and execution right relative to Wiz. And I remember when Wiz did that Series B and I said, we’ve got a product issue. They’re killing us, you know, in terms of how fast they’re growing on product. And so this was a case where we lost money betting in the space. And some of these great, great friends of ours made a lot of money betting on the competitors. You know, we’ve had plenty of wins here. And, but this was one of those humbling times. Like, what did we, what did we get wrong, right? In terms of team and execution and shows how hard this business is built, right? It is a razor’s edge between, you know, the promised land and not making anything because the winners tend to walk away with, you know, a disproportionate amount of the prize. So any reflections, Bill, just you’ve been around this for a while, $32 billion of enterprise value created in five years?

Back Repeat Enterprise Founders

Repeat entrepreneurs in the enterprise space are a golden ticket for investors.
Their learned experiences in go-to-market strategy offer a higher probability of success.

Transcript: Bill Gurley Definitely. And I would qualify one statement. You said they made a lot of money. Sounds like that won’t happen until 2026. So let’s not count the chickens just yet. Yeah, look, one takeaway I have, which my partners don’t, they don’t think it’s fair, but I’m going to say it anyway. Repeat entrepreneurs in the enterprise space are a golden ticket. Like it is so there are so many learned experiences about go. Mostly I think about go to market that are repeatable that you can line them up and do it again. And I always think of the workday example is like picture proof of this, right? It’s the team that built PeopleSaw. And they just came and did it on the new platform. And the technology stack’s always changing. And when it changes, it allows for a new entrant to come along and be disruptive relative to that. And this has happened over and over and over again from mainframe to minis, minis to client server, client server to the internet, internet to the cloud. It just happens over and over again. And so if you have a repeat entrepreneur and you can, you know, establish a relationship where they’re going to want to come back to you again. Shout out to my partner, Peter Fenton, working with Brett Taylor again, which is a perfect example of this. Frank Slootman. Yeah, the odds of success are way, way, way higher. And as you said, hat tip to Leonie, he’s been around a long time having a win this big at the, you know, at the, I won’t put him to pasture, but at the end of your career, it’s just super impressive. But I think it’s, I think, you know, the key takeaway for me is that the repeat entrepreneur with a new wave in enterprise is probably the best way to increase your probability of success.

FTC’s Approach to M&A

FTC Chair Lina Khan’s approach is not necessarily anti-M&A but focuses on addressing fraud, monopoly, and collusion.
This stance could create a more predictable environment for businesses considering M&A.

Transcript: Brad Gerstner Yeah. So let’s talk about that a little bit, the approval process, because I’ve got a lot of questions. Because it’s not only important to this one, Bill, it’s important to the signal. Are we going to unleash animal spirits around M&A or are we going to quash them before they get out of the gate? So let’s talk about the FTC for a second. Right. The chair of the FTC, Matthew Ferguson, I think there’ve been a lot of misinformation about about where kind of he stands on M&A. And so the headlines that I saw over the course of the last couple of weeks, in particular, there was a quote that I saw Bloomberg and a bunch of other people reporting where he said, we’re Not going to be deferential to the C-suite. We are going to be the cop on the beat for big tech. And people combined those two things and said, oh my God, this is a continuation of Lena Khan, right? Here we thought we were moving into a totally different business environment, but that doesn’t sound good at all. So I went back and I read the transcript on a couple of his long interviews. And of course, they pulled those two things out of the interview, but I don’t think it’s reflective of where he stands. So just a couple of data points that I would add to the conversation. One is when asked specifically as to whether or not he differed with Lena Khan, he said really quickly, I’ve written hundreds of pages of dissents with Lena Khan. And he said, the number one area I differ with the prior administration is that they lingered. They created a regulatory fear state that nobody wanted to do anything because literally they would bring an action and then nothing would happen. It would just die over time on the vine. And it was like purgatory for all these companies. And so no deals got done. He said, I’m going to be a cop on the beat, But he said, number one, I’m going to go to court or get out of the way and let business thrive. That is a totally different mindset. Go to court because you’re clearly in violation of the law, or I’m going to get out of the way and let the business thrive. So that sounds to me like we’re going to get pretty quick action here. Like we’re going to know one way or the other what they want to do. And then the second point he made, he said, I’m not a regulator. Think about that. I’m not a regulator. I’m a cop on the beat. I’m looking for fraud, monopoly, or collusion. And I think those two things may well define a very clear and differentiated approach to the FTC. And I think it’s going to be reflected here. I think we have an unbelievable opportunity to unleash an incredible amount of economic growth and capital finding its best home and best place to grow businesses with a lot of pent-up M&A. And I will tell you this, when I look in the public market, I see great businesses that are growing 10%, 20%, 30% that are trading at six or seven times revenue. This deal just got done at over 30 times revenue. There’s ample room for buyers and sellers to meet in the middle if the United States is truly open for business.

Bill Gurley And I would argue that at least in terms of GoogleWiz, it passes that test. It’s none of those three things. So hopefully it will move through quickly. And it sounds like we’ve got on the flip side, on the IPO front, there’s talk of CoreWeave in the chute. Rumors about Klarna, I think Cerebris is in the chute. It’d be great if we see some IPOs. Do you have any perspective or data on what we might see and when?

Brad Gerstner My data is, remember, I’m on the buy side. So when Goldman or Morgan Stanley want to sell one of these things, our phone rings and they want to check market conditions. They want to check what we’re thinking, you know, and then eventually, you know, the roadshow occurs, et cetera. And I would say all of that, our phones are ringing. There’s a lot of activity, the ones you mentioned and many others. So again, think about this. The NASdaq’s down 10% bill in a month. And notwithstanding that, we get a huge M&A deal announced and we have the pipeline fall on the IPO front. So this to me is a strong signal that people believe this is much more of a pro-growth administration that’s going to be supportive of deal making. And if that stuff happens, then I will say whatever you think about tariffs, whatever uncertainty is sitting in your mind about tariffs, there’s a lot of upside from this activity percolating Through. One thing I would bring up and that is pertinent to April 2nd, which is you and I just said that Matthew Ferguson, the FTC may in fact clear the way here. But the question is, what are the Europeans going to say? Remember, they’ve been the ones who’ve been the pain in the ass on all this stuff, right? And these companies now have significant presence in Europe. And so if the Europeans continue to bite our ankles, I think this is one of the things the administration is going to point out on April 2nd and just say, like, we can’t have this, right? You can’t effectively thwart business activity between two American companies because you’re going to sit there and impose, you know, these harsh standards, right, from an M&A perspective. And that, I think, is going to get kicked into the domain of the trade negotiations and tariff negotiations. This would fall into the bucket bill of a non-tariff trade barrier that we’re going to punish American companies with excessive regulation that, in fact, hurts our ability to do business.

NVIDIA’s Focus and Market Undervaluation

NVIDIA’s focus on building supercomputers and software, exemplified by CUDA and Blackwell, drives demand.
The market undervalues NVIDIA, given its low multiple compared to S&P and its growth potential.

Transcript: Brad Gerstner Jensen is in full founder mode. They’re executing brilliantly and they’re an American company. And so, you know, and by the way, we take that for granted. It’s not, you know, like I don’t think we should take it for granted because we just got done talking about how competitive the Chinese are with BYD. It could very well turn the tables and we could be dependent upon Huawei for next generation AI chips instead of the United States. And so protecting that level of innovation here in Silicon Valley is important, but let’s talk about what we learned.

Bill Gurley Just very quickly, while you’re on that topic, Jensen was born in Taiwan. And as many have highlighted, many of the founders and leaders of all these incredible American tech companies are either first generation immigrants or second. And so I do hope I hearken back to when President Trump told the all in crowd that he wanted a staple of ESA to every diploma. I hope those activities are underway. I have not seen any visible activities on that front, but I hope those activities are underway. No doubt about it.

Brad Gerstner I will tell you when you think about in particular, the chip companies, Bill, Liputan, the new CEO of Intel, I think born in Malaysia, you know, I think every one of them has a CEO who was Born in Southeast Asia, China, or Taiwan. And so I couldn’t agree with you more. Immigration, smart immigration, smart immigration is a huge national competitive advantage, and we ought to continue to focus on that. So what came out of GTC that’s the same or different than what we knew? Let’s just start at the top by saying the stock’s basically flat, right? The stock peaked last year around 150 bucks a share. It got as low as 105 the other day. It’s back to 115. On consensus numbers, NVIDIA is trading at about 20 times next year’s consensus earnings estimates. That’s really low relative to the S&P. It’s trading about 24 times this year’s consensus estimates. That’s, again, lower than the S&P average. So this is not a demanding multiple. Why is it trading there, Bill? Well, people are worried about the demand. They’re like, is AI overhyped? Is the demand going to continue to be there? What about DeepSeek? What about the competition from ASICS, et cetera? So there is a big wall of worry about this. And even among the Mag7, Apple, et cetera, all of those stocks, Costco’s trading at 50 times earnings. So we have a lot of non-tech companies without a lot of growth that are trading at much higher earnings multiples at this point than NVIDIA.

Government Policies and AI Race

The Biden administration’s diffusion rule and export controls hinder U.S. competitiveness in AI.
These policies may inadvertently benefit Huawei and other international competitors.

Transcript: Brad Gerstner Know, he said this morning that he doesn’t think he said on CNBC, I don’t think tariffs will have a near-term impact on our business. And there’s a lot of talk, Bill. We’ve talked here about the Biden AI diffusion rule that makes it much harder to sell these chips to 50 countries, this convoluted system. We’ve talked about the fact that Chinese export controls are likely going up. We’re going to get this announcement on sectoral tariffs on April 2nd. Do you have any points of view or any thoughts about what we should be doing with regard to those things and NVIDIA? If you were the president, would you be imposing higher export controls? Would you be getting rid of the diffusion rule or keeping the diffusion rule? How would you think about it?

Bill Gurley Let me make one brief comment, and then I’ll answer that question. I do want to agree with you on one point. I’m looking at a list.

Brad Gerstner Oh my God, you’re going to agree with me on a point.

Bill Gurley Well, I don’t think our job here is to just agree with each other. It’d be a very uninteresting podcast. So I try and maybe create an alternate viewpoint. But I look at the MAG- and I’m looking at them ranked by market cap. And if you ask the question, I think you would agree with this. If you ask the question, which of these companies is executing the fastest right now? And which of these companies is most exposed to global trends? NVIDIA would win both of those, correct? Correct.

Brad Gerstner Yeah. I mean, listen, it’s a smaller position than it was the last couple of years because all of our position sizes are smaller as I took down risk at the start of this year. But again, I don’t expect this is going to be one of those flash in the pan. Oh, it’s up three X because multiples expand a lot. I’m assuming multiples stay largely the same. And I just get the benefit from the great execution and the top line and the earnings growth of the business. And I will say, you know, this slide that I showed you here, Bill, Wall Street consensus expectations are basically that NVIDIA tops out at $250 billion of revenue. Like somehow there’s like this ceiling there. And if you believe that to be true, then their share of the market falls off a cliff because the market’s growing really fast. I don’t think they’re going to lose share of market. If anything, I think they probably gained share of market in a fast-growing market. But I do think back to the diffusion rules. There are a lot of people who are around the rim at GTC, and they are very worried about tariffs. They’re very worried about the Biden era AI diffusion rule. They’re really worried about Chinese export controls. And, you know, so I just thought I’d get your- Well, look, I continue.

Bill Gurley I said it a few weeks ago. I think the number one risk on the stock is government action from D.C. And, you know, a lot of people have been asking questions about the percentage of the revenue that goes to Singapore. And then they replied and say that’s billing, not shipping. And then people say, well, where is it being shipped to? And there’s all these questions about DeepSeek and where they trained. And I certainly think that it’s impossible to stop a startup from any country from traveling to Europe or Malaysia and running a model. Like, I don’t know how you’re going to prevent that and moving the bits back. And so I don’t think there’s a solvable problem, but I also think there’s a lot of angst in DC about China. I think a lot of it’s misplaced and overly angry. I think your friends at OpenAI added to that last week by putting out an anti-deep seek paper that I thought was quite sad. Like if a company like GM or Ford were to put out a paper like that about BYD, we would look at them and go, oh, you just want the government’s help. You must be uncompetitive. And so I don’t know why we would think about that differently from one of our leading AI models. But I do think that these people have a lot of power. I think it’s a bipartisan issue. And I think it’s the number one risk on the stock flat out.

Brad Gerstner My view on this is if we impose high structural tariffs, and if we allow this crazy Biden era diffusion rule to stay in place, which makes it hard for us to export our chips, I literally Think it’s unilaterally disarming America in the race to AI. I think it’s a very bad decision.

Bill Gurley And positive for Huawei, right? Correct.

Brad Gerstner It’s going to lead to a Huawei Belt and Road. Listen, I already think this has backfired against us. DeepSeek is running inference on Huawei 910s, because they may not be as efficient as NVIDIA, but they just throw a hell of a lot more power, which they got a lot of in China, at these chips, And they can do it. And part of the reason China has been forced to build a vertically integrated domestic supply chain, literally from design to fabrication around chips, is because the United States Made it super hard for them to get their hands on NVIDIA chips. And so we really have to ask the question, did we achieve our mission? And there are a bunch of people arguing, well, we need to even throw higher export controls on China. You know, listen, I don’t want to do anything to make it easy on China. I’m fine trying to slow China down a little bit. I just think it’s a task in futility. There’s no denying they already have frontier models. They’re releasing them every day. Their frontier models are smaller. It’s the deep seek moment. Now Baba has one. ByteDance has one. So that horse is out of the barn, as we’ve already seen with BYD, as we already saw with CATL, right? China is going to have frontier capabilities. The bigger issue is this bill, on the diffusion rule, right? Which the Trump administration ought to throw away and start over. This diffusion rule will make it hard for us to get chips to Saudi Arabia, to the UAE, to India, to, you know, our friends in Southeast Asia. And it makes it hard through this regulatory capture that some of the U.S. CSPs put in place, you know, all these hoops they have to jump through. And I just see Huawei walking right through that door, you know, and beginning to, you know, run the table globally, like, frankly, done. Remember, they said this would never occur in telecom equipment bill because of Nortel and all the highly capable telecom equipment of the United States. Huawei ran the table across the globe with Huawei gear because the U.S. Did this.

Consumer AI Demand and Competition

Consumer AI demand is high, with OpenAI’s ChatGPT leading in app store rankings and user base.
Other players like DeepSeek and Grok face challenges in dislodging ChatGPT’s inertia.

Transcript: Brad Gerstner One, just thinking about we had the launch of Grok, Big Bang, the launch of DeepSeek. Maybe we just check in a little bit. Gemini’s had some updates on where we are in the state of consumer AI demand. And importantly, the topic that I’ve been reading about around contribution margins. Even if revenue is growing, are they selling dollars for 50 cents, and are they losing money on each incremental unit of business? I’ll kick it off by saying this. When I look in the App Store, DeepSeek jumped up to number two and was there for a couple days. ChatGPT was at number one at the time App Store downloads. Now DeepSeek isn’t in the top 100 last time I checked. When Grok jumped up to number two for a few days, last time I checked, it’s now around 65. Gemini never really jumped up. It’s hanging out around 55. The point being, and ChatGPT is still number one in the app store. The point being, I’ve said about consumer markets now for a while, that all my pattern recognition from Google and Meta is that these tend to be win or take most markets, that it’s almost Impossible to dislodge the inertia. You can’t get there by being slightly better. At this point, you’re going to have to be 10x better than chat GPT to slow down that inertia. That was the learning from prior, from these prior periods. And now I, you know, we’ve seen the reports, over 400 million weekly average users. And I would tell you, I believe that OpenAI is massively supply constrained. I think they’re building these two huge campuses, data centers, one in Abilene, Texas, the other one in Denton, Texas, one with Oracle, one with CoreWeave. And I think they have to build all that just to actually launch the products that they currently have. That’s not even supporting future growth. It’s just like supporting the demand they currently have. I think they have four or five products literally sitting on the shelf because they don’t have the compute to deliver it to customers. Any thoughts there, Bill? Like, have we seen, do we know the winner already in consumer AI?

Bill Gurley Well, I mean, I think your argument is very, very solid. Like, I don’t think there’s any data points that would suggest that there’s an immediate threat to that. I would think that the powers that be at Google and Grok, you know, and Meta and Amazon must be up at night all night trying to solve this problem. And so I guess, you know, Netscape had Microsoft, uh, open AI has, you know, four or five of the most powerful companies in the world aimed at them. And so it’s a, you’re right. They have a lead. It could be insurmountable. They have, you know, all the King’s horses and all the king’s men behind them. And so it’ll be interesting to watch. You know, we’ve talked about the thing. I think if someone crushed voice, it might give them an advantage to move fast. That might be particularly compute intensive, which we’ll get into our next topic. But for now, I don’t have any ability to take the other side of your argument.

Brad Gerstner Well, you know who the couple I didn’t mention there? I didn’t mention Meta, right? And we know those guys are in full beast mode, but they’ve been unusually quiet. Like, I’m actually shocked how slow we’ve seen any change there in terms of a standalone consumer app. I know it’s coming, but I’ve heard it’s been coming for a long time. And or even the integration within their existing apps. I’d love to talk with Zuckerberg about that. And the other one is Apple, right? And we’ve talked about that again, just not seeing any real change there. And in the meantime, I’m seeing, I think the stuff that we’re going to see over the course of the next eight to 10 weeks out of open AI, as they get these releases teed up, I think it’s going To be pretty profound and, you know, continue to add, you know, to add pressure to that lead. But let’s ask the question.

Bill Gurley One thing I have been thinking about. So I do think that DeepSeek, by choosing to be more open than Llama and the key area, they’re more open than Llama. They don’t have these caps. And so Llama and Mistraw and a few others, they claim to be open. But if you get too big, you have to go pay the piper. And so, you know, and there’s always been a continuum of open source. Like it’s always every company chooses their spot on that continuum and tries to see what they can get away with. Because DeepSeek is so prevalent in the enterprise right now, my point of view, and it’s been forked like 1500 times on Hugging Face, like, and for all the reasons open source works, That’s why that’s happening. I do think it’s an interesting moment in time for Meta in particular to consider maybe going left and getting even more open with Llama, which I think would be really powerful for them. And this probably won’t happen, but even OpenAI could consider doing that. If you’re right, that they’re a consumer product company, there’s not much risk in taking that leap. And it would undermine anyone else that’s trying to compete based on the quality of their proprietary model.

AI Pricing and Market Share

In winner-take-all VC markets, AI companies prioritize market share over cost and value pricing.
This creates a buyer’s market where consumers benefit from subsidized compute costs.

Transcript: Bill Gurley Or do you just price to market, meaning I can’t lose because of price. And so it becomes a buyer’s market. I’ll create a theoretical example because I think there’s also an issue of stacking. Pick on any company. Let’s say you have a large model provider that’s buying compute from a hyperscaler. And then let’s say there’s a startup doing voice for the enterprise on top of that model provider. And all these people are buying compute from the one below

Negative Gross Margin AI Theory

Bill Gurley’s "Girly negative gross margin AI theory" suggests that many AI startups operate at a loss to gain market share.
This creates a buyer’s market where consumers indirectly buy compute from hyperscalers at subsidized prices, potentially leading to triple-counting revenues and distorting market economics.

Transcript: Bill Gurley And so it becomes a buyer’s market. I’ll create a theoretical example because I think there’s also an issue of stacking. Pick on any company. Let’s say you have a large model provider that’s buying compute from a hyperscaler. And then let’s say there’s a startup doing voice for the enterprise on top of that model provider. And all these people are buying compute from the one below it. If those second layer and the third layer are both negative gross margin. The consumer’s buying compute from the hyperscaler at a price that’s lower than they would if they bought it directly because it’s being subsidized by two players in the middle. And on top of that, if this is true,

Negative Gross Margin AI Theory

In winner-take-all VC markets, AI companies may price to market instead of cost, potentially leading to negative gross margins.
This can be exacerbated by stacking, where multiple layers of companies, each with negative gross margins, subsidize the consumer’s compute costs.

1min Snip

Transcript: Brad Gerstner And when you take those two things into account, because of the large percentage of their revenue that is indirect, that they have very little or no contribution margin, right? So no net revenue really flowing through the P&L. Now, juxtapose that against somebody like OpenAI, where almost all of their business is direct. So they don’t have to pay traffic acquisition costs or rev share to anybody, right? Which obviously you have to, that has to be the business model because the cost of serving these things are expensive. Now, of course, both of those things ignore, Bill, your overhead and your training costs, right? And so that’s truly fully loaded. But I’m just looking even at the contribution margin level, because if you’re not meaningfully positive at contribution margin, then you have no chance of covering the cost on a fully Burdened P&L. Yeah.

Bill Gurley So here’s, I’ve been thinking about this a lot.

AI Unit Economics

Anthropic, selling its enterprise API through AWS, incurs high customer acquisition costs, resulting in low contribution margins.
OpenAI, with direct sales, avoids these costs and has higher contribution margins.

Transcript: Brad Gerstner So in the case of Anthropic, most of their enterprise API, I believe is sold through AWS. And they have to pay a huge customer acquisition fee in the world of Google. We would call it TAC, probably to Amazon. And then, of course, you have all the costs that you have to pay to actually serve the model, right? And there’s a variable cost associated with serving the model. And when you take those two things into account, because of the large percentage of their revenue that is indirect, that they have very little or no contribution margin, right? So no net revenue really flowing through the P&L. Now, juxtapose that against somebody like OpenAI, where almost all of their business is direct. So they don’t have to pay traffic acquisition costs or rev share to anybody, right? Which obviously you have to, that has to be the business model because the cost of serving these things are expensive. Now, of course, both of those things ignore, Bill, your overhead and your training costs, right? And so that’s truly fully loaded. But I’m just looking even at the contribution margin level, because if you’re not meaningfully positive at contribution margin, then you have no chance of covering the cost on a fully Burdened P&L. Yeah.

Bill Gurley So here’s, I’ve been thinking about this a lot. I will introduce, let’s just call this loosely and a first draft, an idea that I’ll call the girly negative gross margin

Gurley Negative Gross Margin AI Theory

The VC-fueled AI market, with its winner-take-all mentality and complex unit economics, could be headed for a substantial reset.
Negative gross margins, combined with stacked business models and abundant VC funding, create a messy and unsustainable situation.

Transcript: Bill Gurley So here’s, I’ve been thinking about this a lot. I will introduce, let’s just call this loosely and a first draft, an idea that I’ll call the girly negative gross margin AI theory. Okay. Here we go. Because my brain, I can wander in some pretty interesting places all by myself. But a lot of people have been comparing things to the internet revolution. And, you know, I know why they do that. There’s so much excitement, you know, for all similar reasons. And so they want metaphors and comparisons. Economics are messy here because you have, you know, you have variable costs that is, especially if you’re buying, you know, your compute from someone else, you may have CapEx. And then there’s a question of, are you depreciating that over how long? And do you charge the unit economics against that? Some of these players have credits they were given by the large platforms as investors. Do you really take that into account or not? And in addition, you have tons of VC money. And so if you’re going to raise billions of dollars, you’re going to have high burn rates. These things just are part of the game. In addition, I think there is a mindset that most VC markets are winner take all. And so you can’t lose market share, right? It’s just you can’t lose market share. So if you can’t lose market share, how do you price? Do you price to market or do you price to cost and value like you would in an economic textbook? Or do you just price to market, meaning I can’t lose because of price. And so it becomes a buyer’s market. I’ll create a theoretical example because I think there’s also an issue of stacking. Pick on any company. Let’s say you have a large model provider that’s buying compute from a hyperscaler. And then let’s say there’s a startup doing voice for the enterprise on top of that model provider. And all these people are buying compute from the one below it. If those second layer and the third layer are both negative gross margin. The consumer’s buying compute from the hyperscaler at a price that’s lower than they would if they bought it directly because it’s being subsidized by two players in the middle. And on top of that, if this is true, you’re triple counting revenues, right? Like there’s a transaction that a consumer is making against this model, but because it’s negative gross margin, you’re literally adding it up three times. Same thing would be true if you were, you know, in a really what people would consider a shitty business. If you were just, you know, a global distributor of retail products and you’re taking 5%, although here it’s negative. And so this theoretically could be happening out there, you know, and you, you pile in the tons of VC money, the fact that everyone believes these markets are winner take all the fact That, that the founders are likely unsophisticated financially, not, not, not, I’m not like taking shots at them. They probably haven’t had a lot of finance classes and you don’t have great visibility on unit economics. It’s set up, it’s set up to be messy and you could, you know, you could have substantial resets as people get in touch with unit economics when, and if they’re forced to, and that’s a very Unpredictable, um, time window of when that, when, when that would This is a theory. I’m not suggesting it’s 100% true. It’s possible this is going on.

Gurley’s Negative Gross Margin Theory

Bill Gurley’s theory suggests current AI business models might be unsustainable due to negative gross margins.
Factors like VC funding, winner-take-all mindset, and unsophisticated pricing contribute to this.

Efficient Internet Businesses

Successful internet businesses, like Google and Meta, have near-zero marginal unit costs to serve a customer.
This economic efficiency contributed to their profitability and minimal upfront capital needs.

Transcript: Bill Gurley And this is a really important point. In the internet, the businesses that work, the marginal unit cost to serve a customer were near zero. Were near zero. For Google, which is partially why it was so economically efficient. I think

AI Unit Economics vs. Google

Successful internet businesses, like Google, had near-zero marginal costs for serving customers, making them economically efficient.
Current AI businesses lack this efficiency and haven’t proven their models to be as lucrative.

Sustainable AI Business Models

Sustainable AI business models will likely resemble those of successful internet companies, with low customer acquisition costs.
Current revenue numbers are misleading without considering associated costs and margins.

Transcript: Brad Gerstner Listen, I think the one place I would absolutely agree with you, is that the unit economics and the ability to compare across these businesses is messy. That’s number one. Number two, what I would agree with you on is in no way are these business models proven yet to be anywhere close to as good as Google. Remember, Google raised less than 50 million dollars before they went public, right? And so Google was able to do what they did with very little upfront capital, and then their unit economics from the very start were profitable.

Bill Gurley And this is a really important point. In the internet, the businesses that work, the marginal unit cost to serve a customer were near zero. Were near zero. For Google, which is partially why it was so economically efficient. I think that was true for Meta also.

Brad Gerstner Right. And I will tell you, so here’s my takeaway. For whatever AI companies emerge with a consumer business model or an enterprise business model where they fully control the top of the funnel, where those people are coming to them At almost no incremental cost because their friend told them about it or whatever. There’s no marketing cost. And so your only cost is actually serving the inference to support that customer. I think those will have unit economics that are exceptional at maturity look a lot like the internet companies. But I will say that right now you hear these top line revenue numbers. And the first thing you ought to be asking yourself is who do they have to pay to get that revenue? Right. And what are they loading in terms of their variable cost against that revenue? Time will tell, but my sense is there aren’t very many sustainable business models here today. And I think what I mean by that is that you’re going to have to support this level of CapEx that these companies are undertaking. You’re going to have to have tens of billions of dollars in high margin revenue in order to support the reinvestment that you’re making on the back end of these businesses. Obviously, I think the best position one at this moment, subject to change in terms of the independent players, is OpenAI. But remember, for Meta, they have a printing press kicking out billion-dollar bills in the back room, so they can invest against this for a long time. Amazon can, Google can, to your earlier point, Bill, right? You’re not going to have a clearing event here where it’s winner take most because these guys will continue to throw money at it for a long time. And I would say among the other independent players, Elon and Grok have a great product, have executed incredibly well, and he has a unique, very, very unique ability to raise global Capital for a long time along with x.ai. So you absolutely can’t count him out of the race. But maybe we just wrap it there. I mean, there’s, you know, it’s a, you know, it’s a period of consolidation for sure. You got a lot of uncertainty in the world. You got NVIDIA trading at 20 times earnings. You got a lot of questions about these companies, but we’re going to turn over a lot of cards, I think in terms of these products over the course of the next eight, 10, 12 weeks, we’re going To turn over a lot of cards on tariffs, on, you know, kind of status of the reconciliation bill and taxes, et cetera.

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