Which ASX shares could soar if AI falls into a $500 billion hole?

The math ain't mathing for one professional investor.

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Artificial intelligence might be creating a costly problem. If it comes unstuck, a few ASX shares could win from the AI fallout.

The recent stratospheric rise of artificial intelligence has attracted investors far and wide. It's not hard to understand why… the share price of AI-enabler Nvidia Corp (NASDAQ: NVDA) has rocketed 211% in one year.

In times like these, it's worth taking a step back to reflect. While pondering, I stumbled upon a perceptive blog by Sequoia Capital partner David Chan. In it, Chan unpacks the pin that may pop the AI bubble.

Money for nothing?

Data centre revenue is Nvidia's largest source of revenue, stemming from the AI boom.

During the trailing 12 months, the chip designer racked up US$79.8 billion in revenue. It's safe to say these data centres — such as Microsoft Azure, Amazon Web Services, and Google Cloud Platform — are spending a huge chunk of money on AI-capable hardware.

Nvidia's annualised revenue from its data centre segment is expected to reach US$150 billion by the fourth quarter. According to Chan's analysis, graphics processing units (GPUs) — Nvidia's hardware — account for about half of a data centre's operating cost.

The Sequoia Capital partner then explains that the end users, i.e., companies using AI compute, need to make a return on their spend. Assuming a 50% gross margin, end users need to generate $600 billion in revenue from AI products for the $150 billion outlay to be worthwhile, as shown in the summary below.

Source: AI's $600B Question, Sequoia Capital

Where's the problem?

According to Chan, OpenAI generates most of the AI revenue, totalling $3.4 billion. Other startups also make some money, but none surpass $100 million per year.

Chan assumes the tech giants will be able to make about $10 billion annually from AI features. Even then, a $500 billion difference exists between required AI revenue and expected — what Chan calls a '$500 billion hole'.

Excess AI supply could boost these ASX shares

If a massive overestimation of AI demand eventuates, where might the opportunities be?

Imagine processing power in a data centre as akin to a hotel room. When you have more rooms than guests, the logical move is to drop prices until all rooms are filled — it's better to make $50 per night than $0.

I suspect data centres will do the same if they have more hardware than needed.

Some ASX shares might benefit from underwhelming AI demand. I believe companies with significant cloud costs would reap the rewards of a data centre glut.

Think companies like REA Group Ltd (ASX: REA), WiseTech Global Ltd (ASX: WTC), and Xero Ltd (ASX: XRO). These companies depend on data centres to host data and run functions on behalf of their customers.

According to accounting firm EY, cloud hosting costs 'account for 6% to 12% of [software as a service] revenue and constitute a sizable portion of their cost of goods sold (COGS). Therefore, it stands to reason that companies reliant on the cloud could see margins widen if data centre costs plunge.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Nvidia, REA Group, WiseTech Global, and Xero. The Motley Fool Australia has positions in and has recommended WiseTech Global and Xero. The Motley Fool Australia has recommended Nvidia and REA Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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