Comment refers to this Moon of Alabama blog post:
A.I. Valuations Reach La La Land
The Artificial Intelligence mania has officially reached la la land.
Oracle, OpenAI Sign Massive $300 Billion Cloud Computing Deal (archived) – Wall Street Journal
The majority of new revenue revealed by Oracle will come from OpenAI deal, sources say
OpenAI signed a contract with Oracle to purchase $300 billion in computing power over roughly five years, people familiar with the matter said, a massive commitment that far outstrips the startup’s current revenue.
…
The Oracle contract will require 4.5 gigawatts of power capacity, roughly comparable to the electricity produced by more than two Hoover Dams or the amount consumed by about four million homes.Oracle shares surged by as much as 43% on Wednesday after the cloud company revealed it added $317 billion in future contract revenue during its latest quarter that ended in Aug. 31.
The increase in Oracle’s potential future revenue (not profits) does not justify the increase of its share price. Especially as the whole deal is unlikely to ever being fulfilled:
Continued at this link:
https://www.moonofalabama.org/2025/09/ai-valuations-reach-la-la-land-1.html#more
Reader comment starts here:
The economic force being driven by AI investment amounts to four of the companies (Microsoft, Amazon, Google & Meta) hiring contractors to build data centers & then leasing the centers from a 3rd party in order to burn through generative AI, a product which makes a relatively small amount of money before losing more.
The generative AI industry is, @ its core, unnatural. It does not make significant revenue compared to its burdensome costs, nor does it have much revenue potential.
Unlike software, it requires an unbelievable amount of physical infrastructure to run. Note in the example above that Microsoft, Amazon, Google & Meta are not themselves investing capital in building or owning the physical structures (data centers) needed to facilitate the compute.
They are outsourcing this work to third party contractors and then *leasing* the facilities. It’s not like a railroad company in the late 19th Century installing its rails & ties through Glacier, Montana’s Rocky Mountains in order to facilitate cross-country shipping & travel and then owning/maintaining the hardware.
In our contemporary case, the Mag 7 companies are not sharing the risk/reward for the infrastructure compute at-scale requires. The pressure put on electrical grids to bump transmission in order to handle data center needs has caused municipal utility rates to increase, for instance. Who is mainly shouldering this financial burden-?
Limited transmission capacity in older grid equipment increases prices by creating “congestion,” w/ overloaded power lines unable to carry more electricity on account of overheating risks. This leads to using higher-cost, less efficient electricity in order to meet demand. Additionally, natural gas plants and other energy sources are trying to connect, and they experience the same sluggish & complicated interlink process that limited capacity causes.
It’s like a two-way highway built in the 1950s, and expected to convey a modest amount of traffic, but is now forced to handle an intense rush-hour.
Data centers consumed 4% of the U.S.’s total electricity in 2023. The Dept of Energy estimates that will increase to 12% by 2028.
The tough thing is that the cost of new transmission lines & other equipment for grid upgrades falls on municipal customers.
Weirdly, there are no profits & there are no exit strategies for hyper-hype liquidity in AI ventures.
For instance, Cursor is a coding product built atop Anthropic’s LLM-derived AI. Cursor is Anthropic’s largest client, the 2nd largest being Github Copilot. An acquisition price for Cursor hovers @ the $10bn tier, and no investors are rushing to acquire it @ that rate.
Companies like Cursor @ $10bn and Open AI @ $500bn (in August 2025,) can’t be bought and can’t go public because the valuations are outlandishly out of reach.
If there are no IPOs or buyouts, it is not possible for venture firms, who ploughed billions of cap into these businesses, to gain a return.
Posted by: steel_porcupine | Sep 12 2025 13:29 utc | 2
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