Sam Lessin: xAI-X merger is AOL Time Warner with a debt noose, and mid-market AI players are overvalued

here. There he is. Welcome to TBPN. You going to get me in here and get me out of here? Want some hot takes? Spice it up. Yeah. I mean, you know what we're talking about. XAI. What's the take? Sustaining. We got So, we technically have like 12 minutes, so we should probably just let you just go on a giga rant.

Just rant. But first, I want to say you're the only person I know that's been getting more tan throughout winter. I think it's And I think it's because of all the tennis. But you also were you were you skiing recently? It's because of the skiing and I'm not done. I'm not done. He's not done.

He's putting up 60 days on the Epic Pass or whatever. Epic. What What do you think? I am a basic Where? There's no passes. There's an app that you track your days in. I forget what it's called, but people track it. Garmin. Maybe it's a Garmin one. Okay. Garmin. Garmin. Uh there is no epic where I go. Okay. Yeah.

There's no chair lifts. It's all helicopters and cats, right? No, it is. Listen, I'm just trying to live the VC dream, you know. You're doing it. You're doing it. Keep it up. Yeah. Uh speak dreaming on something. Yeah. You were probably, you know, uh midway down some peak when the news broke. Uh but talk to us.

What was your reaction? We we had sort of a a you know sort of I remain sort of long-term bullish Elon having a sort of an AI bet and how could he not? Yeah. Yeah. Yeah. And and on you know this platform that we've built uh our you know our show on but uh to me it's like you know it's generally like complicated.

There's a lot of ways to kind of like you know maybe poke some some holes in it. But I was curious to get your initial reaction as somebody who's been, you know, bearish uh bearish on just a lot of stuff in AI on everything except because the reaction was like like people people were really big tech. Yeah.

People were just like immediately like yeah this makes total sense you know etc. But, you know, there's So, look, I I actually think to Elon's credit, it makes total sense of very Elon, right? Like Elon is the king of cheap money, right? If no one played Zerp in history better than Elon, right?

You basically come up with a long-term vision that can require infinite capital. You're the world's greatest marketer. You sell the out of it. You raise infinite free money and you build stuff, right? He did that great. Now, it turns out the Zer free money is over. But you know where there's free money?

AI narratives, right? AI narratives is where the free money is. So obviously Elon's got to have an AI narrative because he's the king of free money. And so I think when you look at the Twitter X thing, I mean it seemed I mean he literally named them there like how could they not end up combining?

Like literally one was distributing the other. They're layered on top of each other. They basically have the same name. And to Elon's credit in terms of pulling this off, I mean what is this really? This is AOL Time Warner. If Time Warner had like a ton of debt, right?

like and so and so you use an inflated you use the zerocost capital inflated valuation thing which is the AI thing to buy the thing you also happen to own that's an actual asset Twitter's great I love Twitter right but it also has a what tens of billions of dollar debt noose around it right it's 12 it's not tens it's 12 exactly oh twelves sorry a 12 of debt around it and like what's not to like about it, right?

If you're Elon, it's a great deal all around. Um, is what I would say, but what does it actually add up to? I mean, like look, the entire question is what are these I call the mid-market AI players actually worth, right? And that's the I mean, I again, as you know, I've been very consistent on this for years.

If you're the biggest in the world and your cost of capital is zero, um, sure, like build out a huge AI infrastructure. Ideally, one where it's non-cannibalistic like Meta. Ideally, one where you know how to make money off of it, like Meta. Mhm.

If you're a tiny baby player, take all the leverage, fire your customer service team, like be more efficient. Hooray. But I think these mid-market players, I don't understand the numbers.

I mean, you said it makes sense for Elon, but I feel like when we were looking through the deal, it's like the Solar City Tesla acquisition. And it looks and it and it looks good for the Tesla shareholders, too, because they they effectively get out at the same price they got in at. They're in this new thing.

If you're a Tesla shareholder, are you happy or not? Well, wait, which one's Tesla now? Are we saying that that XAI is Tesla? No. No.

So, so if you went in on the Twitter deal and you're sitting at X and it and the valuation probably went down and then it goes back up and it get and you get out at like 44, it's about where you got in, but now you're in this combined entity. Uh well, let's let's put it this way.

I think the question the question is there's probably and I don't know this, you guys probably do. There's got to be some market for XAI shares floating around on and and markets, you know, things that are worth what people are willing to pay for them.

So, if you bought into Twitter at 44 and it's not worth 44 despite the fact I love it, despite the fact you guys love it, it's just not, right? And all of a sudden there's a market for Xi plus Twitter at whatever the number is and you can get out and you want out, like who cares, right? Um so this seems like a win-win.

It's not just Elon like the the original Twitter shareholders are also happy. But I guess but if you're I don't know if you're an X. AI shareholder. It's just kind of I mean this kind of fits in the world of you know we we live in a world of spheres of influence right now. This is not my line by the way.

It's a smarter hedge fund friends of mine line which is we've gone from kind of a legalistic globally open market to a world of multipolar worlds of fears spheres of influence. You know if you bought into X. ai you bought into Elon sphere. If you bought into Twitter, you bought into Elon's sphere.

What are things actually worth? You know, like who knows? But like you're kind of just betting on Elon holistically. And this is the nice consolidation which by the way gets him out of a very large debt bill, right? That he was personally liable for in some way, shape, or form.

But I mean, it it just feels like Tesla Solar City all over again. But if you Tesla Solar City, that deal worked out for everyone. Well, it's not clear it actually worked out for Tesla shareholder. It's fine cuz it's a rounding error, right? They're making 10 billion now.

They're making Tesla energy on batteries and stuff. Yeah, they pivoted away from that. Do they need Solar City for that? Maybe not. Like, if you think about the Solar City story when was pretty weak when it was acquired.

It was we're going to stick solar panels on the roofs of Teslas and that's why we should buy this thing. Like it it didn't really make any sense, right? In the house of the Tesla owner, right? Eh, I mean, so you're already there to install the install the battery pack, install the charger, install We all I get it.

I'm saying we all know you look back on the history of that deal. That was a this thing is about to die, bail out. I'll come up with a one-page letter that makes that justifies it cuz we're going to put some solar panels on the roofs or some right? It was like completely made up.

Now, when number go up, all sins are forgiven, right? And so what I'd say is number go up so everyone's fine and no one who's the master of number go up. He's the master of number go up, right? So, everyone should be happy. So, is that's kind of that's the kind of story in general.

I think there's a real Elon narrative which is master of zerocost money in master of narrative number go up, right? And the reality is it's kind of like very Roman is like as long as everyone's getting paid, everyone's on your side. Even Doge, right? Like the whole thing with the Dogecoin is brilliant.

Like the best way to build more followers is to get them paid, right? And Elon has been the king of that. Now, the question is it works in both directions and we'll see how that plays out.

Now, um but you know, I think what I'm what I'm interested in is like I want to hear Elon speak for an hour about the combined entity and what that really means versus data and distribution, right? Like the two narratives have been like, you know, X AI gets distribution, X uh and and sort of data.

So, so it makes sense, but for me it was it was more easy to visualize how X was worth $44 billion when it's sort of an Elon pure play sort of social media bet in a you know strategic uh influential asset and if he is able to continue to grow earnings and grow the importance of the platform it's easy to see how that's like you know maybe it's a hundred billion dollar company someday now you have XAI and it's you know you're sort of looking at this collective entity being like it's a founder it's a pure play like founder bet at this price.

I mean, look, I in the end of the day, the problem with alts AI stuff is it's either worth infinity or zero. And no rational person can do a discounted cash flow on an infinity or zero, right? And and I think that's kind of where everyone's stuck, which is why it's so narrative dominated.

Personally, I have to say I actually quite like Grock. I use it like I have on my home screen Grock and OpenAI and all of them next to each other and when my finger goes, which button do I press? I press Grock. You know why? Because it's kind of marginally faster and fun, whatever. I don't know what that's worth, right?

Um, but we'll see, right? And the and the and the the bullcase for that behavior is that Grock could replace Google for Exactly. I say Google's a multi- trillion dollar company. You slice it up and all of a sudden you're getting a couple hundred billion dollar bet. This is the mistake.

This is a mistake that people make, I think, consistently when thinking about AI, which is the story of will you use LLMs to look things up? Yeah, of course. Yeah, you're definitely going to use them.

Like, you know, but the idea, it's kind of like the same story as when people say, hey, I pay accountant $120,000 a year. AI accountant $10 a year, therefore AI accountant worth 120 times. That's not how it works. It's just it's worth 10.

and like the mar it's all about the marginal advantage and so it's not clear to me I mean the it is very clear to me that a lot of search volume that currently goes through Google and gets resolved by you know shitty web pages people have set up to farm those searches goes that behavior goes away um where commerce go where the ads dollars actually go and whether just searches like it's just not the same market configuration anymore and who gets that money that that's all like really TBD is my Um, and it's really unclear.

I mean, again, it's a very binary game. So, that's the one that So, I think it's very hard to value um, right now. But I think the big picture is like so long as private investors are willing to put the hail Marys, the binary outcomes and believe that, you know, again, Elon is the king of cheap money.

How do you feel about uh, market concentration? Google has like 99% of the search market. Meta has 99% of the social networking market. Uh it feels like LLMs could be a little bit more oligopolistic on the consumer side, but if history is any guide, like these monopolies kind of run away with it at some point.

What are you feeling? You know what? Actually, I think the question is if you think really what I'd say with Google and Meta are is they're not technologies, they're economies, right?

And this is the really I think the mistake people make is if you think that Google's a technology company and Google search is technology purely then and you're like wow technology tends to compound and run away then you're like yeah like this would end up that way. Same thing with social networking.

There's no actual techn I mean yes there was like some stuff Facebook invented on the way to scale but like it's not fundamentally a technology company. It's an economy and I think that the problem with LLMs is people are equating them to an economy but they're not. They're just a technical level.

Now, if someone actually nailed the everyone's pouring every single thought they have into it and all the knowledge of the world into the LLM and then that single LM side is like the smartest thing in the world, but that's what they're doing with this deal.

You go on X and you get paid a creator payout for bringing information to X and then that gets siphoned into XAI and GR gets better answers. Agree.

But here's the thing that you have to understand and this is really important is one of the big economic failures of the internet is that the economy of the internet both social and search is actually driven around entertainment right and engagement not around information or truth right and so the reality is what you're basically at best that's what the economies work that's why we're so screwed on so many things is because there's actually no economy of truth there's an economy of of entertainment and I think that's getting going to get quashed in a bunch of ways because again if nothing else and LLMs do generate infinite free personalized entertainment, right?

And like that's going to like crush that economy. It's not clear to me. I mean, I can tell you the vision where yes, for some reason X becomes this machine that pumps all of the world's knowledge and then somehow Grock has some fundamental advantage on know.

I can tell you the story, but I don't see any indication of that actually being what's played out. And I would argue that again that was the same story Google had didn't play out that way. It ended up being a commerce engine, you know, and a bunch of like, you know, dead internet theory stuff.

Unfortunately, it's not the way that social played out either because social is just like a dopamine feed. Unfortunately, it's not an information machine. And so, that's really the question of how you get there. Um, and I I we'll see.

I I I am very skeptical that the mid-market players who are saying LLMs are a compounding e economy actually have anything right now. I think they have technology that's pretty fun and it's all pretty undifferiated. Um, but we'll see. Where do you think XAI would trade if it were to IPO uh tomorrow?

Well, so this is a really interesting question, right? Because basically you have two dynamics at play. Either it's traded as a memecoin, right? If it's traded as a memecoin, it might be huge, right? Um, it's the same thing with like, you know, Mr. Beast wants to go public.

We talked about him, you know, the last time we I was on. It's like if Mr. Beast's you know public company trades like a memecoin. It trades like GME then it might be a very very large number.

If it trades on a discounted cash flow basis or as like a traditional accepted business the way like not very well right and so I think that's really just the question you know as the retail versus um you know enterprise versus like effectively real serious business world compete.

How these things trade is all about the marginal buyer right and what that marginal buyer's belief system is as much as anything else. Yeah. Got it. Well, we got to move on to the next interview. Bye for talk to you soon. He said bye, friends. Great to have you, Sam. Thanks for coming on. Um, we got a uh is it Chris?

Oh, wait. No. Oh, we got David. Is he in the waiting room? Coming in.