Capex and Depreciation Explained: Why Chip Lifetime Drives AI Profits

Business Pill 32 · Why the lifetime of a chip matters

Capital spending is spread over the years an asset is expected to last. For AI chips, a small change in assumed lifetime moves billions between years.

A short explainer video. The numbers in it are round numbers for illustration.

Two Kinds of Spending

Companies spend money in two ways. Some spending is used up at once: salaries, electricity, rent. That is operating expense.

Other spending buys something that lasts for years: a building, a machine, a chip. That is capital expenditure, capex.

Depreciation

Capex is not counted as a cost all at once. It is spread over the years the asset is expected to last. That yearly slice is called depreciation.

A Worked Example

The video uses round numbers. A company buys chips for $6 billion. If it assumes they last six years, the cost is $1 billion a year. If it assumes three years, the cost is $2 billion a year. Same chips, same cash, very different profit.

And the lifetime is a judgment. Nobody knows for certain how long an AI chip stays useful. It may keep working for 10 years. But if a newer chip does the same job for a third of the power, the old one may stop earning much sooner.

Why It Matters

This is why depreciation is watched so closely in AI. The spending is enormous, and a small change in the assumed lifetime moves billions between years.

The cash leaves on day one. The cost appears slowly, over years. So for a while, profit can look healthy while the cash is already gone.

Three Questions to Ask

1. How much is being spent on assets?
2. Over how many years is it spread?
3. What happens if those assets age faster than planned?

See It in the News

Lambda’s $1B GPU Loan Is Underwritten by Contracts, Not Chips. A news piece on financing GPUs against contracts rather than the chips themselves.

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