Top economist warns that the AI math doesn’t make sense: ‘Profits are currently being funded by investors rather than earned from customers’

AI expert Torsten Slok has cautioned that the booming AI industry's profits are not being generated by customer demand, but rather by investors hoping to profit from the next big technological revolution. In a blog post, Slok examined AI's value chain and found that companies manufacturing AI models and applications have negative operating margins of -59%, while those producing silicon and equipment have the highest profit margins at 41%.

Slok explained that this wide gap exists because the AI boom's profits are currently being funded by investors instead of profits earned from end customers. He warned that should AI financing slow down, the industry could face instability due to the uneven profit margin structure. The Bank of International Settlements has also expressed concerns over the hyperscalers' aggressive capital expenditures, which have outpaced earnings and free cash flow, leading to increased debt issuance.

Tech writer Ed Zitron further highlighted the precariousness of AI spending by pointing to Oracle's negative cash flow and massive debt. He argued that the current AI boom may not result in widespread applications of the technology, and if major tech companies slow down their AI spending, it could lead to a significant disruption in the industry.