A $25 billion credit investor says betting only on AI chips overlooks the bigger cycle

The surge in artificial intelligence (AI) is undeniable, but a leading credit investor argues that focusing solely on AI chips neglects the broader landscape of investment opportunities. Scott Goodwin, cofounder and managing partner of Diameter Capital Partners, emphasized the significance of understanding the overarching cycle of AI development during a recent appearance on the 'Goldman Sachs Exchanges' podcast. Goodwin, whose firm manages approximately $25 billion in assets, pointed out that while chips are a critical component of AI, they are just one piece of a larger puzzle. He and his partner Jonathan Lewinsohn believe that the AI boom is a long-term, transformative cycle that goes far beyond merely investing in the most apparent successes. Diameter Capital has strategically identified areas where AI demand is expected to create less obvious bottlenecks, particularly within credit markets. This approach led them to invest in the unsecured debt of a midsize telecommunications firm in 2023. Goodwin explained that as the industry shifts from training AI models to practical applications, the focus will increasingly move from chips to the networks that facilitate data transmission. He noted, "It had to leave the data center. How would it leave? It would leave on the commercial fiber, the pipes." This strategic bet proved fruitful when the telecom company secured over $10 billion in contracts with major cloud providers, resulting in a rebound of its debt to face value. Additionally, Diameter Capital made significant investments in a satellite company linked to wireless spectrum, which also yielded positive returns after the company monetized its spectrum assets. Goodwin's insights come at a time when the sustainability of high AI valuations is under scrutiny. He cautioned that certain segments of the AI credit market might be harboring risks that are difficult to evaluate, especially in chip financing. Many investors are taking on what he describes as "residual risk," which involves betting on the future value of hardware within a rapidly evolving technological landscape. With technology firms frequently updating their products, the lifespan of chips can be short-lived. Goodwin expressed concern, stating, "We call up really smart people in Silicon Valley and ask them about the residual value of these chips years down the line. None of them have a clue." Looking ahead, Goodwin believes that the next phase of AI investment will pivot from mere infrastructure spending to a focus on competitive disruption. He posed critical questions about which companies will adapt to AI advancements and outpace their competitors, suggesting that this competitive cycle could extend well beyond traditional capital expenditure timelines.