← All research Research · Technology and AI · No. 06

Artificial Intelligence

What AI is, why it arrived now, where the value accrues, and what it means for the economy and for work.

AI is a general-purpose technology arriving faster, and with more capital behind it, than any before it. Building the frontier has never been more expensive, while using it has never been cheaper, and nearly every debate about AI as an investment is an argument about which curve wins.

Chapters
9
Reading time
26 min
Updated
100MUsers in 2 monthsChatGPT, the fastest-ever consumer app
$4.4TAnnual valuegen-AI profit potential (McKinsey)
300MJobs exposedto automation worldwide (Goldman Sachs)
$725BCapex in 2026ehyperscaler AI infrastructure spend; five-company tally $803-828B (Oct 2026)

What this argues

  1. AI is a general-purpose technologyLike electricity or the internet, it shows up everywhere, not in one sector.
  2. The economics just invertedTraining a frontier model costs hundreds of millions; using one costs almost nothing.
  3. Value concentrates at the bottom of the stackChips and cloud capture the profits (NVIDIA data-centre revenue hit $89B in one quarter), while the application layer is still contested.
  4. The prize is measured in trillionsBut so is the capital chasing it, raising a genuine bubble question.
  5. Work is reshaped, not erasedExposure is broad, but history favours augmentation over wholesale replacement.
00

What has changed

Updated November 2026

$193.7BNVIDIA FY26 data-centre revenueUp 68% (NVIDIA Q4 FY26 release, 25 Feb 2026)
$89.0BNVIDIA data-centre revenue, one quarterQ2 FY27, ended July 2026, up 117% year on year (NVIDIA, 26 Aug 2026)
$803-828B2026 capex, five large spendersAmazon, Microsoft, Alphabet, Meta, SpaceX (Business Insider via Hargreaves Lansdown, 30 Oct 2026)
$965BAnthropic valuationAfter a $65B round in May 2026 (Bloomberg, as reported)
February to August 2026

NVIDIA's data-centre revenue kept compounding

  • Fiscal 2026 (year to January 2026): data-centre revenue $193.7B, up 68%; total revenue $215.9B (NVIDIA Q4 FY26 release, 25 Feb 2026).
  • Q2 fiscal 2027 (quarter ended 26 July 2026): total revenue $96.2B, data-centre $89.0B, up 117% year on year; Q3 revenue guided to about $108B, assuming no China data-centre compute revenue (NVIDIA, 26 Aug 2026, as reported by trade press).
  • China demand is disputed: Culper Research, a short seller that posted on 13 May 2026 that it is short NVIDIA, says over 20% of FY2026 compute revenue stayed driven by China through Southeast Asian intermediaries (Culper Research, 13 May 2026, report not opened; Benzinga, May 2026). The outlook above excludes China data-centre compute revenue; NVIDIA has said diversion claims about one customer were investigated and debunked, and I found no reply to Culper by name (The Hill, 29 Oct 2026). The NVIDIA page (/investing/nvidia) sets out both sides.
October 2026

Capex guidance rose again, with one trim

  • Five-company 2026 capex forecast: $803-828B; Q3 spend about $227B, up roughly 20% from $188.5B in Q2 (Business Insider via Hargreaves Lansdown, 30 Oct 2026).
  • Amazon held about $220B of cash capex for 2026 and signalled meaningfully more in 2027; Microsoft trimmed its calendar-2026 outlook to about $170B on third-party data-centre delays; Alphabet's CFO said 2027 capex should increase significantly.
  • This tally includes SpaceX and is wider than the four-company series in the capex chart.
Q2 to August 2026

Frontier-lab revenue scaled sharply

  • Anthropic: annualised run-rate revenue reported above $65B by end of July 2026, from about $47B in May (Bloomberg, as cited by Analytics India Magazine, 21 Aug 2026); Q2 revenue $11.6B (WSJ, as cited).
  • OpenAI: Q2 2026 revenue $6.7B, up 18% on the quarter; FT reported annual revenue of about $40B (as cited, 21 Aug 2026).
  • Run rates are company or press figures, not audited accounts, and the deck's frontier-AI revenue estimates in chapter 06 pre-date them.
May to August 2026

Private valuations and IPO filings

  • Anthropic raised $65B at a $965B valuation in May 2026 and confidentially filed for a US IPO in June (Bloomberg, FT, as cited, Aug 2026).
  • OpenAI's latest private valuation is $852B after a $122B round in March 2026; it also filed confidentially in June and has indicated a 2027 listing (CNBC, as cited).
April 2026

Stanford's 2026 AI Index confirmed the cost deflation

The ninth AI Index (13 April 2026) was reported, via secondary coverage, to again show GPT-3.5-level inference falling from $20 to about $0.07 per million tokens (over 280x) between late 2022 and late 2024, and global AI compute capacity growing about 3.3x a year since 2022. The report itself was not read directly.

Not refreshed: training-cost bar chart (no 2025-26 frontier cost figure verified), Epoch compute curve, McKinsey and Goldman Sachs estimates, the 2025 market-size figure, occupation exposure data, the hyperscaler four-company capex series by year, and the frontier-AI revenue estimates in chapter 06.

Test yourself

Q3 spend of about $227B compares with $188.5B in Q2. Roughly what is the quarterly rise?

Why does the chapter say its five-company capex tally differs from the capex chart later in the deck?

01

What AI Actually Is

First principles

AI is software that learns patterns from data, instead of following rules a human wrote by hand.

That one shift, from programming to learning, is why AI can now do things no one could explicitly code.

Definitions

The words nest inside one another, they are not synonyms

TermWhat it means
01 Artificial Intelligencethe broad goal: machines doing tasks that seem to need 'intelligence'.
02 Machine Learningsystems that improve from examples rather than explicit rules.
03 Deep Learningmany-layered neural networks, the engine behind the modern boom.
04 Generative AIcreates new text, images, code and audio, the 2020s breakthrough.
Capability

Three kinds of AI, and only one exists today

KindStatusDescription
Narrow AItodayexcels at one task: translation, image recognition, chat. Every system in use today is narrow.
General AI (AGI)contestedhuman-level ability across most tasks. Claimed near by some labs; disputed by many researchers.
Superintelligencetheoreticalbeyond human ability across the board. A hypothesis, not a product.
Mechanics

How a model is built once, then used a billion times

  1. Collect data: trillions of words and images are gathered and cleaned.
  2. Train: the model tunes billions of internal 'dials' to predict that data.
  3. The model: a frozen file of learned parameters, the finished 'brain'.
  4. Inference: the model answers your prompt, the part you actually touch.
Economics of a model

Training and inference are opposite economic problems

TrainingInference
Whenonce, up frontevery single query
Cost$100M-$1B for a frontier modelfractions of a cent per request
Resourcetens of thousands of GPUs for monthsa sliver of one GPU for a second
Who paysthe model labthe user / the app
~1 trillionParameters in a frontier modelEach is a numerical 'dial' set during training. GPT-3 had 175 billion; today's largest models are several times larger still.

Test yourself

Which pairing best describes inference versus training?

A news story says an AI system 'writes essays and paints pictures'. Which term best fits?

02

Why Now: The Three Unlocks

A 70-year overnight success

History

AI is 70 years old; the breakthrough is recent

  1. Turing: the test is posed
  2. AlexNet: deep learning works
  3. Transformer: the modern architecture
  4. ChatGPT: AI goes mainstream
  5. Agents: AI begins to act

Almost everything you use today descends from one 2017 idea: the transformer. It let models learn from enormous datasets in parallel, the unlock that made scale pay off.

The three unlocks

Three things had to arrive at the same time

UnlockWhat it provided
Datathe internet produced a corpus of trillions of words and images to learn from.
ComputeGPUs, chips built for graphics, turned out to be ideal for training neural networks.
Algorithmsthe transformer let models absorb all that data efficiently, at scale.
The compute curve

Training compute has doubled roughly every six months

Training compute of leading models (log scale, 2012 = 1) x vs 2012
View the data
Training compute
20121
202510000000000

Source: Epoch AI, 'Trends in Machine Learning' (2024) · values read from the chart, approximate

The chart's axis runs from 10^0 in 2012 to 10^10 by 2025, labelled approximately 10 billion times since 2012.

The cost curve

The cost of training the frontier has exploded

Estimated cost to train a frontier model $M
View the data
Training cost
Transformer 20170.00067
GPT-3 20204.6
GPT-4 202378
Llama 3.1 2024170
Gemini Ultra 2024192

Source: Stanford HAI, AI Index Report 2025

Labelled values: $670 (Transformer, 2017), $4.6M (GPT-3, 2020), $78M (GPT-4, 2023), $170M (Llama 3.1, 2024), $192M (Gemini Ultra, 2024).

287,000xRise in frontier training cost since 2017From ~$670 for the original Transformer to ~$192M for Gemini Ultra. Analysts expect the first $1-billion training run by 2027.
The other curve

Yet the cost of USING a model has collapsed

Relative price to run a GPT-3.5-class query (values read from chart axis)
View the data
Price
Nov'2220
Feb'2312
Jun'236
Dec'231.5
Apr'240.5
Jul'240.2
Oct'240.1

Source: Stanford HAI, AI Index Report 2025 · values read from the chart, approximate

The central paradox of AI: building the frontier has never been more expensive, while using it has never been cheaper. Hold both facts in mind: nearly every debate about AI as an investment is really an argument about which curve wins.

Test yourself

Training cost rose from about $670 to about $192M. Roughly how large is that multiple?

What does the paradox of AI economics say?

03

The AI Stack

Follow the money

The value chain

AI is built in five layers, and value pools at the bottom

LayerWhat it is
05 ApplicationsChatGPT, Copilot and thousands of vertical apps, what users touch.
04 Toolingthe plumbing that connects models to data and workflows.
03 Foundation modelsthe trained models: OpenAI, Anthropic, Google, Meta.
02 Cloudthe data centres that host the compute, the hyperscalers.
01 Siliconthe chips, GPUs and custom accelerators, that do the maths.
The AI stack, layer 03

One company sells most of the shovels, and the software is the real moat

~85%of AI accelerators shipped in 2024 were NVIDIAThe deeper lock-in is that ~90% of ML developers build on its CUDA software. Stanford HAI's 2026 AI Index reports NVIDIA GPUs at over 60% of global AI compute capacity.
Concentration

Data-centre revenue shows how the value concentrated

NVIDIA data-centre revenue $B
View the data
Data-centre revenue
FY2315
FY2447
FY25115
FY26194

Source: NVIDIA filings; FY26 from the Q4 FY26 release (25 Feb 2026), FY25 derived from reported 68% growth · values read from the chart, approximate

The labs

The foundation-model builders, and their backers

LabProfile
OpenAIGPT family; backed by Microsoft; the consumer breakout with ChatGPT.
AnthropicClaude family; safety-focused; backed by Amazon and Google.
Google DeepMindGemini; uniquely owns chips, cloud, data and distribution.
MetaLlama; gives models away to commoditise the layer beneath its rivals.
xAIGrok; integrated with X; a fast-scaling late entrant.
Mistral / othersEuropean and open-source challengers keeping prices honest.
The fault line

Closed vs open: the industry's defining split

Closed / proprietaryOpen weights
ExamplesGPT, Gemini, ClaudeLlama, Mistral, DeepSeek
Edgefrontier capability, safety controlfree, private, customisable
Modelsell access per tokensell services around free models
Riskcommoditisation from belowwho funds the next $1B run?
The build-out

The hyperscalers are spending like never before

Hyperscaler AI infrastructure capex $B
View the data
Capex
2022162
2023200
2024310
2025410
2026e725

Source: Company guidance; press reports (2025-26); five-company Oct 2026 tally in chapter 00

Value capture

Where the value is being captured, for now

A matrix plots durability of moat (vertical) against value captured today (horizontal). Chips and Cloud sit top-right, in the 'Durable winners' quadrant (Chips furthest right and highest). Apps and Tooling sit left of centre, near the middle of the durability axis, with Apps slightly higher. Models sit lower right, near the 'Emerging' quadrant. The quadrants are labelled Fragile winners (top-left), Durable winners (top-right), Contested (bottom-left) and Emerging (bottom-right). This is an analytical placement, not measured data.

The picks-and-shovels layer is capturing the profits. Whether the application layer ever does is the trillion-dollar question. In past platform shifts the apps eventually won the biggest prizes, but only after the infrastructure was built and cheap.

Test yourself

Why can cheaper AMD chips not simply take share from NVIDIA, per the chapter?

NVIDIA data-centre revenue rose from $15B (FY23) to $193.7B (FY26). About how many times larger?

04

The Economic Prize

How big is the market, really?

The prize

The value at stake is measured in trillions per year

Gen-AI annual value (McKinsey), low and high estimates $T
View the data
LowHigh
Corporate-profit uplift2.64.4
Total incl. broad productivity6.17.9

Source: McKinsey Global Institute (2023)

Three lenses

Three ways to frame the same opportunity

+7%Global GDPadded over ~10 years (Goldman Sachs)
75%Of the valuesits in just four business functions
15-40%Upliftgen-AI adds to all-AI's impact
~$390BMarket in 2025to ~$1.8T by 2030 (~36% CAGR)

Sources for these figures: Goldman Sachs (2023); McKinsey (2023); Grand View Research.

Where the value is

Three-quarters of the value sits in four functions

Share of gen-AI value by business function %
View the data
Share of value
Customer operations22
Marketing & sales20
Software engineering18
R&D15
All other25

Source: McKinsey Global Institute (2023)

Adoption speed

Adoption is faster than any technology before it

Years to reach mainstream adoption years
View the data
Years
Telephone45
Electricity30
Automobile35
Internet15
Smartphone8
Gen AI2

Source: Illustrative, compiled from multiple technology-adoption histories

$7 trillionPotential addition to global GDP over a decadeGoldman Sachs' central estimate. But the gain only materialises if adoption translates into measured productivity, which has not yet clearly shown up in the data.

Test yourself

Which four functions together hold the 75% of value in the McKinsey split?

What condition does the chapter attach to the $7 trillion GDP estimate?

05

AI and Work

The question everyone asks

Goldman Sachs estimates 300 million full-time jobs are exposed to AI automation worldwide. 'Exposed' is not 'eliminated', but it does mean the task content of most knowledge work is about to change.

Exposure

Exposure is highest in knowledge work, lowest in manual work

Share of work exposed to AI automation, by occupation group %
View the data
Exposure
Office & admin46
Legal44
Architecture & engineering37
Life & social sciences36
Business & finance35
Healthcare28
Construction6
Cleaning & maintenance1

Source: Goldman Sachs Research (2023)

The real question

Exposed does not mean eliminated

Substitution: the riskComplementation: the base case
WhereRoutine cognitive work: drafting, summarising, boilerplate codeJudgement and context: AI drafts, humans decide
AlsoPredictable tasks: data entry, first-line supportNew roles that did not exist before
And~25% of work could be automated (GS)Higher output per worker, not fewer workers
The long view

What two centuries of automation suggest

  • Automation has always displaced tasks. Yet total employment has risen for 200 years.
  • The transition is the hard part. New jobs arrive, but rarely for the same people, in the same place, at the same time.
  • White-collar goes first this time. Which is economically and politically novel.
  • Productivity is the swing factor. The optimistic GDP case only lands if AI genuinely makes workers faster.

Test yourself

A clerk's job is rated 46% exposed to AI. What is the best reading?

What does the chapter call the hardest part of automation historically?

06

Risks & Debates

The honest chapter

Both sides

The two cases, stated fairly

The bull caseThe bear case
1General-purpose: value shows up across every sectorCapex >> revenue: spend dwarfs today's AI income
2Costs falling: inference deflation drives adoptionThin moats: models converge; prices race to zero
3Compounding: better models beget more use, more dataReliability: hallucination caps high-stakes use
4Early: years into a decades-long build-outLimits: power and quality data are scarce
The risk register

Six risks a serious investor actually tracks

RiskWhat it means
Hallucinationmodels state falsehoods confidently, capping use in law, medicine and finance.
Return on capital$725B of capex must eventually meet real revenue, the core bubble worry.
Thin moatswhen several labs ship comparable models, pricing power evaporates.
Data ceilingsthe stock of high-quality human text is finite and largely used up.
Energy & gridfrontier training power is doubling yearly, straining electricity supply.
Regulation & safetyrules, copyright suits and alignment concerns can gate deployment.
The bubble question

Spending is running far ahead of revenue

Hyperscaler AI capex vs estimated frontier-AI revenue $B
View the data
Hyperscaler AI capexEst. frontier-AI revenue
202431025
2025e41055
2026e725100

Source: Company filings; author estimates of frontier-AI revenue (2024-26)

The counterargument

Why it may not be a bubble

  • Railroads and fibre looked like bubbles too. The capital looked 'wasted', but the infrastructure powered the next century.
  • The spenders are profitable. Hyperscalers fund capex from cash flow, not speculative debt, unlike 1999.
  • Deflation drives demand. Every fall in inference cost unlocks a new tier of viable applications.
  • But timing is everything. Even a real revolution can bankrupt those who arrive too early, or lever too hard.

Test yourself

In 2026e, hyperscaler capex is $725B against estimated frontier-AI revenue of $100B. What is the rough ratio?

Which statement best matches the 'not a bubble' argument?

07

What to Watch

Signposts, not predictions

The dashboard

Four dials to check every quarter

DialMeasuresReading
$/tokenInference pricefalling fast = adoption tailwind
Capex / revSpend disciplinethe ratio the market will punish
Tokens usedReal usagethe demand signal that matters
CapabilityBenchmark gainsare returns to scale still holding?
Key takeaways

Five signposts for the next 24 months

  1. Does inference keep deflating? Continued price collapse is the strongest bull signal.
  2. Do the hyperscalers blink on capex? A guidance cut would reset the whole sector's narrative.
  3. Does an application layer break out? Durable, profitable apps would move value up the stack.
  4. Do open models stay a step behind? If they close the gap, proprietary pricing power fades.
  5. Does productivity show up in the data? The macro case needs measurable output-per-worker gains.

Test yourself

Which signal does the chapter call the strongest bull signal?

Which dial measures the real demand signal?

08

Reference

Glossary & sources

Reference

Plain-language glossary

TermDefinition
Modela trained file of numbers that turns an input into an output.
Tokena chunk of text (~3/4 of a word); models are priced per token.
Inferencerunning a trained model to answer a query, the cheap, repeated part.
GPUa chip built for parallel maths; the workhorse of AI training.
Parameterone adjustable 'dial' inside a model, set during training.
Trainingthe costly, one-time process of teaching a model from data.
Transformerthe 2017 architecture behind virtually all modern AI.
Foundation modela large, general model that many applications build upon.

Building the frontier has never been more expensive. Using it has never been cheaper. Everything about AI as an investment follows from that single sentence.

Key takeaways

The five conclusions to take away

  1. A general-purpose technology: priced and adopted like no other before it.
  2. An inverted cost structure: fortunes to build, pennies to use.
  3. Value pooling at the base: chips and cloud win first; the top of the stack is still open.
  4. A real prize and a real bubble risk: both measured in trillions, at the same time.
  5. Augmentation over replacement: for most work, for now, but the transition will be uneven.
Reference

Sources & further reading

  • Stanford HAI: Artificial Intelligence Index Report 2025 (Chapter 1: R&D).
  • Epoch AI: 'Trends in Machine Learning' and compute/cost trend insights, 2024.
  • McKinsey Global Institute: 'The economic potential of generative AI', June 2023.
  • Goldman Sachs Research: 'The Potentially Large Effects of AI on Economic Growth', 2023.
  • Grand View Research: Artificial Intelligence Market Size & Outlook to 2030.
  • NVIDIA Corporation: Quarterly SEC filings and data-centre segment reporting.
  • Company guidance: Alphabet, Amazon, Meta, Microsoft capital-expenditure disclosures.
  • Vaswani et al.: 'Attention Is All You Need', 2017 (the transformer paper).
  • Figures marked 'estimate' or 'illustrative' are compilations, not primary data.

Test yourself

Which definition correctly describes a token?

Which is NOT one of the five conclusions?

Sources cited

McKinsey Global Institute · Goldman Sachs Research · Stanford HAI · Epoch AI · NVIDIA filings · Company guidance · Press reports · Grand View Research · Industry estimates · Vaswani et al. · NVIDIA, Q4 FY26 and Q2 FY27 results, Feb and Aug 2026 · Business Insider via Hargreaves Lansdown, Oct 2026 · Bloomberg, Aug 2026 (as cited) · WSJ, Aug 2026 (as cited) · Financial Times, Aug 2026 (as cited) · Analytics India Magazine, Aug 2026 · Stanford HAI, AI Index 2026 (secondary coverage) · Culper Research, 'NVIDIA (NVDA): The China Problem', 13 May 2026: report not opened (HTTP 403); Culper's own X thread of 13 May 2026, as unrolled on Thread Reader App, is used instead · Benzinga, 'Tip Of The Iceberg': Culper Research Targets Nvidia's Alleged China Problem, May 2026 (Yahoo Finance copy dated 18 May 2026) · The Hill, Nvidia spokesperson on Megaspeed diversion allegations (article on a New York Times report), 29 Oct 2026

Keep reading

Research, not investment advice. Figures as of , from the sources cited.

Legal information and disclosures

These are my own views as of the update shown on this page. They can change without notice, and I have no duty to update them. Past performance does not indicate future results, and any investment can lose money.

This is for education only. It is not investment, legal, tax, medical or accounting advice, and it is not an offer to sell or a solicitation to buy any security in any jurisdiction. It does not consider your goals or circumstances.

Figures from company filings, public agencies and other third parties are believed to be reliable, but I have not independently verified them and cannot guarantee them. Forecasts and anything marked as an estimate rest on assumptions that may prove wrong.

Please do not copy or republish this material without my written consent.