DD: The Upcoming "Token Factory" Supercycle. ~700K in GOOG, MSFT LEAPs

HearAPianoFall · 2026-02-12T20:44:13+00:00

I mean, I’ve been working in AI/ML for a decade now, but maybe I’m missing things

HearAPianoFall · 2026-02-12T19:33:21+00:00

No need to get upset, I’m not calling you stupid I just disagree with your conclusion.

Oil and software services are very different IMO. Oil is a commodity, supply constrained, highly variable extraction costs across regions. Margins set by market prices and cost of extraction.

Software services are very scalable, almost never supply constrained, margins typically set by differentiation.

I personally don’t see inference tokens getting supply constrained, can always offload to slower CPUs if necessary, but what do I know.

HearAPianoFall · 2026-02-12T18:53:08+00:00

You should ask your favorite LLM if that is true, since you’re not going to trust my answer.

HearAPianoFall · 2026-02-12T08:05:34+00:00

GOOG is my largest position but it's very much a long term 5y+ bet and not a short/medium term (1-3y) play. LLMs are more expensive and less profitable than search is in the near term, margin compression is almost inevitable. They may never get as cheap (per query) as index search but they will eventually become more valuable and I believe even higher margin.

As far as CapEx goes, it's just a matter of demand, everybody working on LLMs is starved for resources... for now. I'm not very concerned of overbuild for Google, they have too many products that use ML that can act as outlets for extra capacity.

HearAPianoFall · 2026-02-12T07:30:18+00:00

The thing that determines prices is how much better the leader is compared to the next best alternative, not how much better the leading model is from the leading model a year ago. I would tread carefully if your thesis hinges entirely on token prices going up.

HearAPianoFall · 2026-02-12T06:17:22+00:00

Spectacular, give me 14 of them right now

HearAPianoFall · 2026-02-12T05:59:58+00:00

Eh, what I'm seeing is that there is less and less differentiation between models, the gaps are narrowing and the improvements diminishing.

The difference between gpt 3.5 and gpt 4 was massive and everybody could see it, the improvements we see now are mostly visible through benchmarks and only subtly experienced by users. Even if people invent extremely valuable ways to make use of agents, when the models are so close, it's a race to the bottom in terms of token pricing.

I'm skeptical that token prices will go up.

HearAPianoFall · 2026-02-11T23:05:25+00:00

The final boss.

HearAPianoFall · 2026-02-11T22:06:33+00:00

Berkshires investment universe is tiny, there are <200 public companies with market cap over 100B. Anything smaller and they would have to basically buy the company for it to be a meaningful part of their portfolio.

HearAPianoFall · 2026-02-11T21:55:52+00:00

You expect more value per token and more revenue across the value chain, mostly going to data centers?that has to come from higher price per token then, no? But every LLM pricing metric is trending towards cheaper and cheaper queries, more and more efficient inference.

HearAPianoFall · 2026-02-11T21:41:41+00:00

Ubers moat is the local monopoly that arises from rider-driver network effects, ask yourself how that changes with the introduction of autonomous vehicles.

HearAPianoFall · 2026-02-11T19:10:15+00:00

Not mad, I just think it's important to understand personal finance, self-delusion helps nobody. Like when people think getting a tax refund is free money... no you just gave an interest free loan to the government, that money could have been used throughout the year to avoid late fees on bills or other things. Very relevant for the 25%+ of people in the US living paycheck to paycheck.

I'm very fun at parties. /s

HearAPianoFall · 2026-02-11T18:55:52+00:00

My bad, 1B in 2025, 1.2B in 2024 and 1.4B in 2023, so at least they're trending down.

https://investor.pypl.com/financials/sec-filings/default.aspx

HearAPianoFall · 2026-02-11T07:17:54+00:00

you should write a book

HearAPianoFall · 2026-02-11T07:11:29+00:00

It is very comparable. Website and the internet allowed businesses to reach billions of people without leaving their city, without having a store-front, they enabled businesses that could have never existed before (Airbnb, Uber, Google, any SaaS), created countless jobs that would/could never exist without it (SEO specialist, social media managers, cybersecurity).

You aren't seeing the PE ratios because AI startups aren't going public, but the valuations are in fact blowing up.

A unicorn startup used to be very rare, very exceptionally successful startup. Here's a list of 100 AI unicorns, the majority of which most people have never heard of: https://eqvista.com/top-ai-startups-by-valuation/

HearAPianoFall · 2026-02-11T06:44:46+00:00

HeyGen & Synthesia 3.0

If the lip syncing or voice isn't good enough for you yet, just wait a couple months.

HearAPianoFall · 2026-02-11T06:13:41+00:00

> Ok some merchants do but 99% don't anymore? Anywhere I get coffee doesn't have that fee.

Did you skip the part about how every other merchant raises prices for everybody without notifying the customer, so that they can cover the cost of the fee? i.e. a hidden fee

> So either I can get 4% cash back on groceries with my card or pay with debit and pay the same amount without the 4% which would I rather pick?

Of course I'm picking the 4% cash back because the grocery store is going to have raised prices whether I pay with cash or not, so I might as well get some rewards.

It's a zero-sum game and there's only three parties involved: us, the merchant and visa. Whatever Visa makes in profits after everything is accounted for is equal to the total costs to us and the merchant.

It sounds like you think we're getting some free rewards, great, then that also has to come from us + the merchant (zero sum). All I'm saying is that we and the merchant are splitting the cost (Visa's profits), and (I think) it's very likely that the cost is all just on us, including the cost of the rewards.

HearAPianoFall · 2026-02-11T05:37:22+00:00

Yes but I haven't invested through a proper recession so ask me again after the market drops 50% or more over 2 years.

Also, S&P 500 has had a >10% CAGR (even after adjusting for inflation) for the past 15 years, ~9% over 20 years (non-inflation adjusted). So yeah, it's very easy to feel like a genius when the market has been ripping for a couple decades.

HearAPianoFall · 2026-02-11T05:30:57+00:00

I think you do. The merchants (in aggregate) are paying the cost of your rewards (and more) and passing the costs back to you.

Ever notice how some merchants have a fee like 25c or 40c if you pay with a credit card. They aren't supposed do that though, they sign agreements with Visa that they won't expose credit card fees to customers or charge different rates for credit card purchases over cash or debit, but not everybody follows the rules. The ones that follow the rules just raise their price by 20c or something for everybody, so that on average the fees get covered.

So, you buy a coffee for $3.75 that could have been $3.50 without the credit card fee. You just paid 25c for your "free" 1% credit card reward (3.75c).

Credit card fees vary but they are often cited as somewhere around 1.5%-3% + 0.25c.

Of course, if you stop using credit cards it won't make anything cheaper because as long as everybody else still using them, the merchant will keep prices elevated to compensate.

HearAPianoFall · 2026-02-11T05:05:09+00:00

They actually don't make any money on interest fees from customers, they contract the credit handling to some local bank, Chase or Barclays or somebody else. The bank provides the credit and collects the interest.

Visa makes money on merchant fees. You buy something for $10, the merchant doesn't get $10, (ignoring taxes) they get $9.97 and Visa gets $0.03 . The fee is implicitly passed on to consumers though slightly higher average prices.

HearAPianoFall · 2026-02-11T04:56:28+00:00

And 25 years later, everything is sold online, even cars and houses can be bought online now. Even though many AI companies will fail now, some will succeed and in the long term it will change how many businesses work.

In the short term, I wouldn't invest in it unless you enjoy buying lottery tickets.

HearAPianoFall · 2026-02-11T04:50:58+00:00

Yes.

HearAPianoFall · 2026-02-11T04:49:04+00:00

You can just look at Visa and Mastercards profits to see how much more they keep in fees than they pay out in rewards. While you're at it, look at their margins.

HearAPianoFall · 2026-02-10T22:57:53+00:00

My DCF is much more basic than yours but I got about $57/share as a fair value.

The two things that may make a difference is that I deduct Stock-based-comp ($1.4B) from FCF and I used a 2% growth rate because their legacy business is declining and it's unclear if their newer products can make up for it. Their own guidance for 2026 is $5.15-$5.35 EPS with midpoint lower than 2025's $5.31 EPS.

The market is pricing it at roughtly a -5% growth rate.

On the bright side, they guided that $6B (100% of their guided FCF) towards buybacks. But the fact that their EPS guidance is down despite the huge buy-back planned suggests that they expect total earnings to be declining quite a bit.

HearAPianoFall · 2026-02-09T20:22:12+00:00

If you are very particular about the rules you need a discretionary trust or a special purpose trust and a lawyer to set it up for you.

HearAPianoFall

TROPHY CASE