Is AI the DotCom Boom All Over Again?
Much like the dot.com mania of the 90s, we are witnessing investors chase anything related to "Artificial Intelligence." Just as the internet had companies adding a "dot.com" address to their corporate name in 1999, today, we are seeing an increasing number of companies announce an "AI" strategy in their corporate outlooks. A key difference versus today was that companies would advance regardless of actual revenue, earnings, or valuations. It only mattered if they were on the cutting edge of the internet revolution. Today, the companies racing higher on Artificial Intelligence have actual revenues and income. But does that difference remove the risk of another disappointing outcome? Given the proliferation of ETFs and money flows into passive indexes, there is a forced feeding frenzy in the largest stocks. The top-10 stocks in the S&P 500 index comprise more than 1/3rd of the index. In other words, a 1% gain in the top-10 stocks is the same as a 1% gain in the bottom 90%. As investors buy shares of a passive ETF, the shares of all the underlying companies must get purchased. Given the massive inflows into ETFs over the last year and subsequent inflows into the top-10 stocks, the mirage of market stability is not surprising. As of June 1st, only 30% of stocks were outperforming the index as a whole. Just as it was in 2000, what eventually causes the market reversal is when reality fails to live up to expectations. While it is certainly possible that those expectations will be met, there is also a considerable risk that something will happen. Just as in 2000, the valuations investors paid for companies like Cisco Systems (CSCO), which was the Nvidia (NVDA) of the Dot.com craze, plunged back to reality. The same could be true for Artificial Intelligence in the future. As noted recently by the WSJ: AI has had an astounding run since OpenAI unveiled ChatGPT to the world in late 2022, and Nvidia has been the biggest winner as everyone races to buy its microchips. To see what could go wrong, note that this isn't the usual speculative mania (though there was a mini-AI bubble last year). Nvidia's profits are rising about as fast as its share price, so if there is a bubble, it's a bubble in demand for chips, not a pure stock bubble. To the extent there is a mispricing, it's more like the banks in 2007-when profits were unsustainably high-than it is to the profitless dot-coms of the 2000 bubble. It is a good analysis of the four things that could go wrong with AI: Demand falls because AI is overhyped. Competition reduces prices. Suppliers ask for a more significant share of the revenue. What if the scale doesn't matter? As Rober McNamee, a Silicon Valley investing legend, stated: "Before investors buy into this we should just ask: How are you going to get paid? How are you going to get a return on something that is effectively a half million dollars each time you do a training set..." These booms provide great opportunities. What remains the same is that analysts and investors once again believe "trees can grow to the sky."
