Everyone seems worried about an AI bubble. It certainly looks that way when negative margin companies like cursor, perplexity or devin are valued at $10bn, or even $20bn seemingly overnight.
When people invest in these companies they are making a speculative technology bet: either the frontier labs lower their prices for their best models, or customers will be happy with something worse but cheaper.
What happens if neither of these things come to pass?
These businesses will have to raise prices in order to become profitable. I think they’ll be able to do this. But the margins will be thin - I don’t know anyone who is willing to pay double for Cursor over Claude Code.
So we may end up with something that looks like a standard retail business: buy some widgets from a manufacturer and sell them on, repackaged or with a better shopping UX.
I don’t mean to trivialise these businesses. Retailers have moats and accrue value. Some have very differentiated user experience - just try buying an iPhone from an Apple store vs your local department store. It’s just that these moats don’t allow you to make 80% margins like the best hardware or software businesses.
So, you’ll end up with quite large and profitable wrappers. But they’ll look more like retailers or distributors, and be valued as such when the noise dies down.
And we’ll end up with the foundation model companies, with 50%+ margins, being the final winners.
Does this look like a bubble? I don’t think so. The amount of intelligence being consumed in this scenario doesn’t change much from the bull case - we’ll still need the chips, compute, and frontier models - it’s just that the majority of the profit will accrue to a few companies. Startup investors in these “retail” platforms will lose lots of money, but VC is still a pretty small industry and these companies are private - hardly a recipe for a bubble.
They winners probably already exist and were founded before ChatGPT with the exception of xAI. I can’t see many others accessing the capital required to build a competitive model at this point.
Full disclosure: I run a company making AI-designed hardware & advanced materials for data centers.