Over the past few years, the tech industry's plans for artificial intelligence have grown from ambitious to outright treacherous, with the amount of money invested in the space so high it now poses a serious risk to the broader economy.
Underlying the broader, often poorly-defined AI tech are data centers, which are vast warehouses stuffed to the brim with specialized chips that transform energy into computational power, thus making all your Grok fact checks possible.
The economics of data centers are fuzzy at best, as the ludicrous amount of money spent building them makes it difficult to get a full picture. In less than two years, for example, Texas revised its fiscal year 2025 cost projection on private data center projects from $130 million to $1 billion.
However, a recent deep dive by Praetorian Capital CIO Harris Kupperman took a peek under the hood of present-day data centers — and for anyone pouring money into the space, his conclusions will be sobering.
"I’ve watched as AI went from an interesting parlor trick for making memes, to something that’s increasingly integrated into my daily workflow," Kupperman conceded. "I am not here to belittle AI, it’s the future, and I recognize that we’re just scratching the surface in terms of what it can do.
But "I also recognize massive capital misallocation when I see it," he continued. "I recognize an insanity bubble, and I recognize hubris."
To that end, Kupperman works out rough calculations for the genuine cost of a data center, factoring in the inevitable breakdown of parts over time. Each data center, he says, is essentially made up of three components: the chips, which become obsolete in just a few years; the systems connecting the chips, which need to be replaced ever decade or so; and the building itself, which should last for quite a while.
Add it all up, and time is not on the data center's side. The finance guru estimates that the "AI datacenters to be built in 2025 will suffer $40 billion of annual depreciation, while generating somewhere between $15 and $20 billion of revenue."
In other words, new data centers have a very tiny runway in which to achieve profits that currently remain way out of reach. By Kupperman's projections, a brand new data center will quickly become a Theseus' ship made up of some of the most expensive technology money can buy. If a new data center doesn't start raking in mountains of cash ASAP, the cost to maintain its aging parts will rapidly overtake the revenue it can bring in.
Given the current rate at which tech companies are spending money without much return — a long-term bet that AI will all but make human labor obsolete — Kupperman estimates that revenue would have to increase ten-fold just to break even. Anything's possible, of course, but it doesn't seem like a hot bet.
"I don’t see how there can ever be any return on investment given the current math," he wrote.
Going even further, to make a profit comparable to similar-sized business ventures, the blogger estimates that American data centers would have to bring in a mammoth sum of $480 billion dollars in 2025 alone. That's to say nothing of data center spending in 2026, which is currently set to grow from $375 billion in 2025 to $500 billion next year, according to the New York Times.
As the years continue to rumble along since the launch of ChatGPT in 2022, where's all that cash going to come from?
For context, Kupperman notes that Netflix brings in just $39 billion in annual revenue from its 300 million subscribers. If AI companies charged Netflix prices for their software, they'd need to field over 3.69 billion paying customers to make a standard profit on data center spending alone — almost half the people on the planet.
"Simply put, at the current trajectory, we're going to hit a wall, and soon," he fretted. "There just isn’t enough revenue and there never can be enough revenue. The world just doesn’t have the ability to pay for this much AI."
More on data centers: AI Data Centers Accused of Creating Major Problems for Local Water Systems
Share This Article