Bullish on AI semiconductor valuations and long-term growth

While the quoted a16z chart is technically factual, it's disingenuous in my view and lends to the flawed conclusion that "semis are making money while hyperscalers are losing money". It's true that hyperscaler free cash flows have turned negative. But it's also true that the hyperscalers are more profitable than they've ever been as measured by operating cash flow, which is growing at accelerated rates (shown below). The fact that they are choosing to reinvest all of this excess OCF back into capex to fund further growth is correct given this dynamic, and is being reinforced by the elevated reported results and customer demand signals, which each indicate positive and increasing returns on invested capital ahead. The free cash flow dispersion between semis and hyperscalers is just a function of the difference in business models and timing, and little else. Semis companies sell their systems at the beginning of the buildout and typically recognize 100% of revenues upfront, whereas hyperscalers spend the money upfront but then monetize that datacenter smoothly throughout a much longer period that spans a decade and beyond. Given that, there is no scenario in which the free cash flow profiles for either cohort would look any differently than they do right now given the magnitude of this ongoing buildout to support AI. So I think these types of headlines are just so overblown. These companies need one another and that's not going to change. And they are both tremendously profitable beneficiaries and providers of the intelligence economy. Having said all of that, the semis group generally still trades at an almost extreme discount to growth (ie NVDA is growing ~100% and trades at 10x), as the market continues to believe (very wrongly in my opinion) that these companies are overearning and that their current profits are not sustainable. And because I believe the buildout will persist at an outsized pace through at least the rest of this decade (and likely longer), I think the opportunity to invest in semis remains more attractive than just about any other sector I follow in tech. But the hyperscalers are also extremely well positioned and undervalued relative to the role they will continue to play, the quality and durability of their franchises, and the accelerating growth rates they've demonstrated and continue to demonstrate. All's to say, the world isn't black or white and I'm getting tired of the debates that pin two of the most attractive sectors in AI against one another. Happy trading.