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The gigawatt question
Simulations of a one-gigawatt AI data center show a 98% failure rate for profitability under current market conditions and build costs.
What: James Thomason modeled a 1-gigawatt AI data center based on current build costs of $35B–$60B and projected rental rates. The analysis indicates that unless GPU-hour prices stabilize or remain high, the current capital-intensive model for providers like CoreWeave risks repeating the 2001 Exodus Communications bankruptcy.
Why it matters: The industry's current economics rely on a 'bet on prices' where the massive debt load assumes continuous high-margin demand, despite signs that model-building efficiencies and cheaper open-weight models may eventually deflate rental rates.
Deep dive
- 1-gigawatt data center costs $35B to $60B to build.
- Simulation of 50,000 scenarios shows 98% result in a net loss at current rates.
- Contracted revenue is only protected if tenants remain solvent and honor agreements.
- CoreWeave's 2025 operating margin was negative when depreciation of GPU hardware is included.
- Renting GPU-hours is structurally similar to airline leasing, where asset depreciation outpaces revenue.
- Open-weight models drive usage through volume, but the Jevons effect only partially offsets the credit risk of frontier model labs.
- Median gigawatt breakeven requires a blended rate of $6.50/hour, well above the current ~$4.50 market rate.
- Revenue must double per unit of hardware to justify current capital costs and debt interest.
Decoder
- Monte Carlo simulation: A mathematical technique that models the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables.
- Take-or-pay: A contract provision that requires the purchaser to pay for a product or service regardless of whether they actually take delivery of it.
- Jevons effect: A phenomenon where technological progress increases the efficiency of resource use, which ironically causes consumption of that resource to rise rather than fall.
- GB300: A hypothetical future NVIDIA GPU architecture used in industry modeling.
- Net Present Value (NPV): The difference between the present value of cash inflows and outflows over a period of time, used to analyze the profitability of a projected investment.
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