I have what some may consider a very controversial opinion, I don't think AI will have high margins. I'm going to go through the reasons I believe this, and you can decide for yourself.
Right now, one of the biggest crunches on AI companies is the price of chips, Those prices will probably drop as chips are historically a cyclical business, however there are still major concerns about the spending of hyperscalers. These are supposedly temporary expenses, but if you need more and more computing capacity, then you're going to have to keep expanding and building these data centers.
Look at these company's cash flow numbers and they've been tanking. I mean, Google has been widely known as one of the most cash flow positive cashflow companies in the entire world, but now even they reported negative free cash flow of about $5.9 billion in its second quarter of 2026, because they've been so focused on these data centers.
Now you need to ask yourself what makes a business highly profitable? low marginal cost, high gross margin, low supply, low competition.Which are all not the case for AI companies.
This is a substitutable good. When one model gets too expensive, these companies just switch out to the cheaper Chinese models. In addition, there are low switching costs, it's not sticky like trying to switch over your CRM. There's almost no friction jumping from model to model.
I understand that you may be able to reduce workforce using the AI and save on labor costs. Right? Maybe. Yes, AI can do a lot of tasks better than humans, but a good chunk of companies who have laid people off and replaced them with AI are bringing those same workers back at an even higher labor cost than they had before.
On top of that, these companies have been issuing new shares and issuing gigantic debentures to help fund this venture that really hasn't brought much back to them to date. There's a gigantic race to the bottom to compete with cheaper Chinese models who are 80 to 90% as good and 10 to 20% of the cost. You never want to be in a place where you're competing on price.
But they're desperate for revenue, taking out loans, issuing debts. So they need this revenue now.And I wonder if this can end up being a case like the streaming services, where at first you get Netflix & it saves you $100-$200 a month compared to cable. Now you need 5 streaming services just to catch half of the biggest content. If you need multiple separate AI subscriptions for different functions of a business, it can end up just costing more or the same as hiring people in the first place.