Silicon Cathedrals

In Ken Follett's 'The Pillars of the Earth' (1989), the fictional Kingsbridge cathedral took a lifetime to rise. Its progress was repeatedly arrested by arson, civil war, and ecclesiastical intrigue. The investment was colossal, yet no spreadsheet could show a positive net present value. It was a gamble on eternity.

In Barcelona, the wager is real and still running. Gaudí's Sagrada Família has been under construction since 1882, funded by alms and admissions. Its architect died in 1926 with most of it unbuilt. Asked why he worked so slowly, he is said to have replied that his client was not in a hurry. Faith does not recognize the time value of money.

When it comes to AI-related capex, the numbers have left the realm of ordinary finance and entered the realm of faith. The handful of firms leading the building of data centers are planning to invest more than $700 billion this year. What are these sites, if not silicon cathedrals?

For tech companies building out their hyperscaler operations, the bet on future cash flow is enormous. Near-term returns are being sacrificed on the assumption that growth and long-term returns will be exceptional. Industry participants operating across the AI value chain appear ready to stomach a possible mid-cycle digestion phase without flinching, treating it as the cost of admission to a new, heavenly economic regime.

Indeed, artificial intelligence has the power to transform the global economy: a large portion of labor will be substituted by electricity, mediated by artificial intelligence and automation, including robotics. The marginal unit of work, whether cognitive or physical, is set to become a marginal kilowatt-hour. Economic savings could be divine (see ‘AI’s NPV > $40 trillion’).

For the broader ecosystem, the valuation challenge is significant. On any traditional discounted cash flow (DCF) methodology, such as ten years of explicit forecast and a conventional perpetuity growth rate, the valuation multiple of many companies is hard to justify. It is no surprise, then, that DCFs tend to be deemphasized by asset managers investing in (US) IPOs. Unlike comparable trading multiples, the DCF is too earthbound to capture the holy spirit of the time.

To support elevated valuation levels, a DCF model must be stretched: twenty years of explicit cash flows with a longer-than-usual growth cycle and margins that barely mean-revert. At that horizon, this is no longer analysis. It is eschatology.

But it would be a grave mistake to consider faith as the enemy of value creation. Abrahamic scripture defines faith as ‘confidence in what we hope for and assurance about what we do not see.’ Isn’t that, uncomfortably, part of any approach to valuation? No decision about the future can be made without faith. Reducing faith to irrationality is simply heretical.

Data centers are the new pillars of the earth. The danger is not faith, but fanaticism. Faith becomes fanaticism the moment no earthly disappointment, such as missed targets or a profit warning, is allowed to count against the creed. That is the moment to watch, with devotion. Otherwise, the world may build a modern tower of Babel.

Genesis 11 - The Tower of Babel

Now the whole earth had one language and the same words. And as they migrated from the east, they came upon a plain in the land of Shinar and settled there. And they said to one another, ‘Come, let us make bricks, and burn them thoroughly.’ And they had brick for stone, and bitumen for mortar. Then they said, ‘Come, let us build ourselves a city, and a tower with its top in the heavens, and let us make a name for ourselves; otherwise, we shall be scattered abroad upon the face of the whole earth.’ The Lord came down to see the city and the tower, which mortals had built. And the Lord said, ‘Look, they are one people, and they have all one language; and this is only the beginning of what they will do; nothing that they propose to do will now be impossible for them. Come, let us go down, and confuse their language there, so that they will not understand one another’s speech.’ So, the Lord scattered them abroad from there over the face of all the earth, and they left off building the city. Therefore, it was called Babel, because there the Lord confused the language of all the earth; and from there the Lord scattered them abroad over the face of all the earth.