Is AI the Next Global Crossing?
Weekly Investment Update | By Brian Schreiner
In the late 1990s, Global Crossing was the golden child of the telecommunications gold rush. Investors poured billions into the company that promised a future of limitless data through a mass of fiber optic cables laid under the world’s oceans.
Wall Street analysts gave the stock a “strong buy” and investors poured in $40 billion in equity and $10 billion in debt financing into the company. In 1999, Global Crossing had a market valuation of more than $50 billion, larger than General Motors, and its fiber-optic telecommunications network connected 200 cities in 27 countries. However, its network capacity far exceeded demand and, in January of 2002, market forces and accounting gimmicks made it the fourth-largest bankruptcy in U.S. history.
Global Crossing was building for a future that everyone knew would arrive, but investors ignored the fact that the company was essentially “on the clock” to deliver on its promises and it needed to maintain investor confidence or its stock value would plummet.
AI is groundbreaking technology. It’s a technological advancement that could be bigger than the internet itself. Like the dot-com bubble, the irrational exuberance in AI is NOT in the idea or the innovation; it’s in the price and investor behavior.
Priced for Perfection
McKinsey & Company estimates that by 2030, data center capex will cost $6.7 trillion worldwide. Fiber optic cable has a lifespan of decades, but GPUs cutting-edge lifespan might be 2 or 3 years. Global Crossing left real infrastructure, but GPUs can become obsolete at the pace of technological advancement, which can be overnight.
Arvind Krishna, chairman and CEO of IBM said last month, there is “no way” tech companies’ massive data center investments make sense. Building a data center that uses one gigawatt of electricity costs an estimated $80 billion, he said. If a single company commits to building out data centers that use 20 to 30 gigawatts, that’s $1.5 trillion in capex, which is an investment larger than the combined market value of Walmart and ExxonMobile.
“It’s my view that there’s no way you’re going to get a return on that, because $8 trillion of capex means you need roughly $800 billion of profit just to pay for the interest,” Krishna said. Moreover, the chips powering data centers quickly become outdated. “You’ve got to use it all in five years, because at that point, you’ve got to throw it away and refill it,” he said.
The industry currently generates roughly $20 billion in revenue against $40 billion in depreciation. You can’t outrun that math forever.
Hedge fund manager, Harris Kuperman of Praetorian Capital offered his own estimates of the AI irrational exuberance on The Market Huddle Podcast: “I want to preface this by saying AI is going to be the future. I totally understand this. I'm not against AI.”
To summarize the rest, Kupperman said: The hyperscalers are subsidizing AI for everyone. Most users pay nothing for AI; it’s a commoditized product, which is enhanced search. The companies are competing it down to zero in terms of revenue fighting over customers. Today you’re using ChatGPT and tomorrow you’ll be using Gemini. They’re spending endless money on the buildout and gaining customers that generate no revenue.
They’re going to spend about $400 billion on AI this year and, if you (generously) assume a 10-year depreciation curve, they need $40 billion in revenue this year, just to cover expenses. But revenue will be $15 to $20 billion this year. Granted, that’s understated because they’re subsidizing engagement, but it still doesn’t even cover depreciation.
Today’s gross margin is highly negative, but if you want to assume that someday there will be a 25% gross margin–which is pretty optimistic since similar things like Bitcoin mining still have negative gross margins–they’re still going to need about $160 billion in annual revenue to break even. Then consider the annual revenue of some of the largest subscription services. Everyone is using Microsoft Office and that generates less than $100 billion per year. Netflix has over 300 million subscribers and it generates about $40 billion per year.
Regardless of how prosperous AI is, the hyperscalers still need $160 billion in annual revenue to cover expenses. And if investors want to earn returns, say about 20% on their invested capital. To get there, they’ll need to generate about half a trillion. I’m not saying AI has to get there necessarily, but that’s where you’d want to be for a massive investment in capital intensive infrastructure which has huge obsolescence risks. And they’re talking about doubling the pace of the buildout in 2026 and so if you double the numbers, it’s just insane and we’re talking about a product that they’re giving away for free today and will likely be commoditized.
That’s the summary of Kupperman’s analysis and I think he’s being more than fair to the hyperscalers and the economics.
AI’s Second-Movers Will be the Winners
Kevin Muir, the podcast host, brought up a good analogy: restaurants and more generally the second-mover advantage. Opening a new restaurant is risky business. Often, the first owner fails and it’s the second or third owner who buys the restaurant fully furnished at cents on the dollar who makes the profit. The second-mover advantage is a powerful force in business, especially technology. Some well-known second-mover tech winners are Google, Amazon and Facebook who essentially reverse engineered Alta Vista, Books.com and MySpace.
I believe that DeepSeek, the definitive second-mover case study of 2025, was a warning shot across the bow of U.S. hyperscalers. The Chinese AI firm effectively upended the AI economy by proving that you don't need a $100 billion data center to compete with the world's best models. While companies like OpenAI and Google were locked in a "Brute Force" race, throwing more money, more chips and more power at the problem, DeepSeek was able to reengineer AI search by capitalizing on the first movers' mistakes and building a leaner, faster, and cheaper alternative.
Next week, in my 2026 Investment Outlook, I’ll be taking a step back to think about the broader investment landscape and how investors should be thinking about investing in a world where asset values are inflated and the global economy is beginning to show signs of weakness.
Finally, I want to express a sincere thank you to my clients and readers. In a year of record-breaking hype and fast-moving markets, your trust is the investment I value most. I wish you and your family a New Year filled with peace and love.
Happy New Year!
“Believers build capacity to meet future demand. The bubble begins to form in part because credit is widely available. Decaying underwriting standards and increasing leverage cause a disconnect between economic fundamentals and market valuations. More and more investors join the crowd—until fundamentals finally prevail and the bubble bursts.”
J.P.Morgan Investment Strategy Report: Is AI a Bubble?
Is AI a Bubble? (J.P.Morgan)
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