Your claim is very strong that “the market implies X”, when I think what you mean is that “the share price is consistent with X”.
There are a lot of assumptions stacked up:
The share price represents the point at which the marginal buyer and marginal seller transact. If you assume both are rational and fundamental, then this represents the NPV of future cash flows for the marginal buyer / seller. Note this is not the same as the median / mean expectation.
You can use some other market expectations for discount rates etc. to translate that into some possible forecast of cash flow. If you are of the view that AI will fundamentally change the market economy, this assumption seems flawed.
The market does not tell you anything about the profile of those cash flows (i.e. all in the short-term vs. spread out over the long-term), so you need to make your own assumption on growth and maturity to get to a cash flow forecast.
You can use assumptions around financing, taxes, capex, etc. to convert from cash flows into pre-tax profit.
Then an assumption of margin to convert from pre-tax profit to revenue. This seems very difficult to forecast. Arguably, margin is at least as important as revenue in determining profit.
I agree all these factors go into it (e.g. I discuss how it’s not the same as the mean expectation in the appendix of the main post, and also the point about AI changing interest rates).
It’s possible I should hedge more in the title of the post. That said, I think the broad conclusion actually holds up to plausible variation in many of these parameters.
For instance, margin is definitely a huge variable, but Nvidia’s margin is already very high. More likely the margin falls, and that means the size of the chip market needs to be even bigger than the estimate.
I do think you should hedge more given the tower of assumptions underneath.
The title of the post is simultaneously very confident (“the market implies” and “but not more”), but also somewhat imprecise (“trillions” and “value”). It was not clear to me that the point you were trying to make was that the number was high.
Your use of “but not more” implies you were also trying to assert the point that it was not that high, but I agree with your point above that the market could be even bigger. If you believe it could be much bigger, that seems inconsistent with the title.
I also think “value” and “revenue” are not equivalent for 2 reasons:
Value should factor in the consumer surplus
Even if you only look at the producer surplus, then you should look at profit not revenue
FWIW this might not be true of the average reader but I felt like I understood all the implicit assumptions Ben was making and I think it’s fine that he didn’t add more caveats/hedging. His argument improved my model of the world.
It’s fair that I only added “(but not more)” to the forum version – it’s not in the original article which was framed more like a lower bound. Though, I stand by “not more” in the sense that the market isn’t expecting it to be *way* more, as you’d get in an intelligence explosion or automation of most of the economy. Anyway I edited it a bit.
I’m not taking revenue to be equivalent to value. I define value as max consumer willingness to pay, which is closely related to consumer surplus.
Your claim is very strong that “the market implies X”, when I think what you mean is that “the share price is consistent with X”.
There are a lot of assumptions stacked up:
The share price represents the point at which the marginal buyer and marginal seller transact. If you assume both are rational and fundamental, then this represents the NPV of future cash flows for the marginal buyer / seller. Note this is not the same as the median / mean expectation.
You can use some other market expectations for discount rates etc. to translate that into some possible forecast of cash flow. If you are of the view that AI will fundamentally change the market economy, this assumption seems flawed.
The market does not tell you anything about the profile of those cash flows (i.e. all in the short-term vs. spread out over the long-term), so you need to make your own assumption on growth and maturity to get to a cash flow forecast.
You can use assumptions around financing, taxes, capex, etc. to convert from cash flows into pre-tax profit.
Then an assumption of margin to convert from pre-tax profit to revenue. This seems very difficult to forecast. Arguably, margin is at least as important as revenue in determining profit.
I agree all these factors go into it (e.g. I discuss how it’s not the same as the mean expectation in the appendix of the main post, and also the point about AI changing interest rates).
It’s possible I should hedge more in the title of the post. That said, I think the broad conclusion actually holds up to plausible variation in many of these parameters.
For instance, margin is definitely a huge variable, but Nvidia’s margin is already very high. More likely the margin falls, and that means the size of the chip market needs to be even bigger than the estimate.
I do think you should hedge more given the tower of assumptions underneath.
The title of the post is simultaneously very confident (“the market implies” and “but not more”), but also somewhat imprecise (“trillions” and “value”). It was not clear to me that the point you were trying to make was that the number was high.
Your use of “but not more” implies you were also trying to assert the point that it was not that high, but I agree with your point above that the market could be even bigger. If you believe it could be much bigger, that seems inconsistent with the title.
I also think “value” and “revenue” are not equivalent for 2 reasons:
Value should factor in the consumer surplus
Even if you only look at the producer surplus, then you should look at profit not revenue
FWIW this might not be true of the average reader but I felt like I understood all the implicit assumptions Ben was making and I think it’s fine that he didn’t add more caveats/hedging. His argument improved my model of the world.
It’s fair that I only added “(but not more)” to the forum version – it’s not in the original article which was framed more like a lower bound. Though, I stand by “not more” in the sense that the market isn’t expecting it to be *way* more, as you’d get in an intelligence explosion or automation of most of the economy. Anyway I edited it a bit.
I’m not taking revenue to be equivalent to value. I define value as max consumer willingness to pay, which is closely related to consumer surplus.