Catalyst Watch
Steady as She Goes
Welcome to Catalyst Watch at The Transcript, a report for paid subscribers that highlights investment themes from this week’s newsletter.
1. Datacenter Construction is Causing Inflation Beyond Just Semiconductor Markets
To this point, inflation driven by the datacenter buildout has mostly been contained to components that go directly into datacenters like GPUs and memory. However, as construction progresses, it appears that some datacenter-driven inflation is spilling beyond datacenters and into adjacent industries. Starwood noted that datacenter construction is driving inflation in construction wages for all commercial real estate:
“What’s really happening is labor is becoming harder to get again because the electrician and the plumber are getting picked off to build the data center at 2x what they’re getting paid to build a house. So that applies to commercial real estate, too. All of the construction that’s needed to build all this stuff, they’re just stealing workers from other verticals in the economy and putting pressure on wages.” - Starwood Property Trust (STWD 1.96%↑) CEO Barry Sternlicht
As hyperscaler capex reaches into trillion-dollar territory, it has economic implications. Jamie Dimon captured this in the quote below.
“It’s also driving the American economy, because the increase alone is 1 percent of GDP. And next year it’s going to be another 1 percent of GDP increase. And so that’s, right now, people have to be hired, and you got to get steel and cement and all these things to build the data centers.” - JPMorgan (JPM 0.45%↑) CEO Jamie Dimon
If datacenter spending adds 1% to GDP, it’s not crazy to think that it could start to drive factors that also impact CPI.
2. Memory Prices are Leading to a Decline In Unit Volumes of Smartphones and PCs
It’s well understood that memory has become one of the leading bottlenecks for AI infrastructure buildout. Elon Musk summed up the dynamics in this quote:
“And one must always consider the limiting factor here. The limiting factor currently is memory. The memory output is increasing by around 20% per year. Now normally, that would be fantastically fast and amazing for any large mature industry. But ask yourself, is the demand increasing by 20% a year? No, the demand is increasing by 200% a year, maybe higher. So if you’ve got demand increasing much faster than supply, then Economics 101 would suggest that the price increases. It does not decrease.” - SpaceX (SPCX 1.44%↑) CEO Elon Musk
It’s also well understood that higher memory prices are impacting the price of consumer electronics including smartphones and PCs. However, it was surprising to read the scale of demand destruction that higher prices are causing for smartphone and PC markets. AMD and Sandisk both discussed their outlook:
“Looking to H2, we’re planning for a softer PC market as higher memory and component costs weigh on demand.” - Advanced Micro Devices ( AMD -1.06%↓) CEO Lisa Su
“Smartphones, PC is very, very important. There’s no doubt those markets are adjusting this calendar year. And we said it in the script, we expect them to stabilize next year. But we see units down mid-teens for both smartphones and PCs this year.” - Sandisk (SNDK 2.88%↑) CEO David Goeckeler
It’s not clear that a mid-teens decline is being reflected in consumer electronics stocks, especially if Apple is affected to the same degree as the rest of the market.
3. Machine Traffic Now Exceeds Human Traffic on the Internet
No matter what you think about the ROI on AI spending, it’s clear that the technology is starting to drive some major structural shifts in economic infrastructure. The quote below from Cloudflare was sobering:
“For the first time in human history, in Q2, more than 50% of the traffic flowing across Cloudflare’s network was not human. The number of requests on our network from AI agents continues to grow unabated. With the web shifting from human-driven browsing to AI-answer engines and agent-driven commerce, we are witnessing a fundamental rewrite of the Internet for machine-to-machine traffic...And to give you a sense of how this trend is playing out and with the big caveat that I have called it wrong at every point along the way, the -- if the current trends continue, we think in 5 years, nonhuman traffic will be as much as 1,000x as much as human traffic. In other words, humans will be a rounding error on the Internet, not because human traffic goes down, but that’s just how fast we’re seeing nonhuman traffic grow.” - Cloudflare (NET 2.97%↑) CEO Matthew Prince
It’s still only been 3.5 years since ChatGPT was released, so to see that 50% of all web traffic at Cloudflare is now driven by machines is pretty incredible.
It’s even more incredible that it’s hard to argue that we are well on our way to having human traffic be dwarfed by machine traffic. If machines generate 1000x the web traffic of humans in 5 years, what does that imply as a proxy for economic production?