Investing In AI Technology

Observant1

"You could do worse than owning companies prominent enough to have their own shared nickname,
but you probably could do better."

"The group on everyone’s lips today is the Magnificent Seven.
The performance of those stocks—especially Nvidia, which will unveil quarterly results this afternoon—
has almost singlehandedly supported the S&P 500 since ChatGPT was unveiled three years ago."

"AI technology certainly has legs, but the arc of history bends toward mediocrity for stocks
once they get their own sobriquet."

https://marketsam.cmail20.com/t/d-e-gjkjdht-duklntldl-r/

Observant1

GQG’s Rajiv Jain: Why the AI Bubble Is Poised to Burst

"Jain came early to the view that today’s stock market is 'much worse' than the dot-com bubble,
which he acknowledges has 'already cost us performance in the short run.'
But he maintains that AI is a bubble that will burst, and that when this happens, it will hit a range of sectors
across the stock market—including industrials, like steel companies buoyed by data center buildouts."

"Jain shared his thesis in a white paper. In a recent interview with Morningstar,
he discusses why he sees warning signs in profit margins for the most advanced semiconductor chips
and the growing use of debt to finance the AI boom, along with what could cause the bubble to burst."

https://www.morningstar.com/sustainable-investing/why-ai-bubble-is-poised-burst-according-gqgs-rajiv-jain

Sven

Yes, Rajiv Jain has been there before. We may not see that AI companies may lean into private debts as Osterweis Strategic Income pointed out. Things can get ugly when things go south quickly.

We have been reducing equity exposure since September. Currently at 40% and that is the lowest we have been in many years.

Old_Joe

It's going to be interesting when we all look back and try to spot what had been "the last straw".

Observant1

"Nvidia reported record sales and strong guidance Wednesday, helping soothe jitters
about an artificial intelligence bubble that have reverberated in markets for the last week."

"In recent weeks, investors have sold off big tech names, worried that companies
are spending far too much money on data centers, chips, and other infrastructure
in the race to design and operate the world’s most powerful AI models,
with little hope of recouping their investments in the near term."

"Wednesday’s result will allow investors to breathe a sigh of relief.
Each Nvidia quarterly earnings report has come to be seen as a financial Super Bowl
of sorts as the AI boom has taken off.
The company is regarded as a bellwether for both the health of the tech industry
and the market as a whole."

https://www.msn.com/en-us/money/top-stocks/nvidia-profits-soar-soothing-investor-jitters-over-ai-boom/ar-AA1QLvOM

WABAC

Everybody talks about how this isn't pets.com, but Jain hits the points I have been thinking about:

During the dot-com era, the big infrastructure builders were incumbent telecommunication businesses and global long-haul telcos and equipment names whose regulated local and long-distance franchises generated stable, utility-like cash flows that underwrote the internet and fiber infrastructure capex binge. Today’s infrastructure arms race is driven by the hyperscalers—Microsoft MSFT, Alphabet GOOG, Amazon AMZN, Meta Platforms META, Oracle ORCL—whose reported free cash is increasingly strained by data center and GPU capex, and whose overall earnings quality is propped up by extending server/chip “useful lives” to five to six years, versus the two to three we believe it will be. And they’re treating very large and increasing stock-based compensation as a non-cash item that is being added back to cash flow metrics.

Am I selling tech? No. It's mostly all in my taxable account, and I mostly bought at much lower prices. I'm not buying either.

But wait, there's more. I wasn't aware of the following:

Let’s take GPU pricing. You can call up distributors, which have publicly listed phone numbers, and some are authorized Nvidia distributors. My question: Why is the Nvidia H200, which was released late last year, selling at a 50%-60% discount if there’s such a shortage? On Nvidia’s website, they’re selling at $40,000-plus. NetworkOutlet.com quoted $25,900 just a couple of days ago. If there’s such a shortage, why are there tens of thousands available? Nvidia’s latest and most powerful AI chips, Blackwell, are also offered at a discount.

Next, GPU rentals. Why are they in freefall? We’ve gotten quotes at under $4 per hour for Nvidia’s Blackwell GPU rentals. Would you let a $50,000 car rent for $4 if the car only has a three-to-four year life? Meanwhile, [Amazon Web Services] charges around $12-$13 for Blackwell. The bulk of new cloud growth is coming from AI startups. If they’re paying $4 per hour versus $12, then AWS can’t compete. Margins for AWS are already coming under pressure. Revenue growth was OK. Why? Because large tech is also investing in Anthropic, OpenAI, and so on. They go back and buy compute [computational resources] from these guys. Nvidia has invested in over 50 startups, which then go back and buy Nvidia chips.

More at the link.

Old_Joe

Sounds pretty much like a cluster something-or-other.

Sven

Thanks everyone - good information. Where can one hid from this AI-mania ? Money market fund?

Edits after NVIDIA reported great sale number yesterday after the market close, one would expect the market to rally. It petered out by noon, and S&P 500 is down over 1%, NASDAZ down, 1.5%, and DJIA down 0.4%. All AI-related stocks are down.