AI Stock Market Bubble: Can the Technology Succeed While Stocks Crash?

During their recent episode of the Value Options Podcast, Travis and Carlisle discussed AI Stock Market Bubble: Can the Technology Succeed While Stocks Crash? Here's an excerpt from the episode:

But then the new theory is that AI is this secular growth engine that will always require more and more chips. And so these things are now secular growers. I don’t know the answer to that question.

That’s a hard question to answer right in the middle of it. What I do know is that they are the beneficiaries of that bullwhip effect where there’s money spent by open AI and all of the hyperscalers are spending that money. And it’s all going to the chip makers, Nvidia, all of those companies are doing really well.

And so it’s flattering their earnings in the short term. Maybe it’s secular, maybe it goes on forever. But the companies doing the spending don’t currently have the revenue to meet that spending, which is why they’re doing the capital raises.

So they either have to start generating revenues from this capex, which likely they can do that. Probably they can do that. I still think in the interim, it’s so complex.

There’s so much movement going on that it could easily be a early 2000s type scenario where the technology is real and it is going to grow in a secular way for decades potentially. But at the same time, you can still have a stock market crash in the middle. You can have companies’ valuations come back.

A crash in this instance is just the biggest names going down because the biggest names are the entire market at the moment. You don’t even need to have a crash, just some of those names coming back. I think that the mag seven are not overvalued.

There’s lots of reasonable valuations and they look pretty good in there. But there are some of those names that are the beneficiaries of the capex spend. I think there’s a lot of water to flow under that bridge yet.

We’re going to find out where those businesses really are. I don’t know the answer to that question. What do you think?

[Tim] No, I would agree, Toby. I mean, look, a few years ago, like 2020, 2021, 2022, housing was in a boom. These companies such as Whirlpool or Home Depot and Lowe’s and the cabinet makers and the faucet makers, their earnings were huge, Toby, just massive earnings per share and fantastic growth that allowed them to really build strong balance sheets.
You feel like, okay, well, they’re little different businesses. They’re not doing some of the same stuff that they did during the financial crisis, but then you get higher interest rates and the dynamic changes completely and the profitability could be because these aren’t wide moat businesses in many senses, right? There’s competitors.

You’re not obligated to use one faucet company or something like that. And so, if the hyperscalers struggle to affordably raise capital at attractive prices that make it attainable for them to earn the return on invested capital that they need to earn on these massive spending projects, the rational thought would be, okay, well, that’s going to reduce demand a little bit for the NVIDIAs and the Microns and you’d expect supply to pick up for those chips, especially with the hyperscalers having their own internal TPU chips, for instance, to more energy efficiently battle the GPUs of NVIDIA. So, I could easily see that if you get prices going down a little bit, a little less demand, a little more supply, how that historically has impacted commodity-type companies such as a Micron or an SK Hynix. Yeah, I mean, I think that there’s a lot of vulnerability there and ultimately that might be good for the AI build-out because then it becomes a little more affordable and more sustainable.

Right now, it seems like we’re at an inflexion point where it’s not going to take long for people to realise that this is a little unsustainable. Meta can’t afford to pay 9% debt, that’s for sure, to do this and still subsidise Muse. I mean, they’re losing a tonne of money just like Anthropic does with Clot.

They’re losing a tonne of money on this stuff.

[Tobias] In that competition, you got to prefer the more established players like Meta and Google, but Anthropic and OpenAI seem to have the lead at the moment. But I was curious, did you ever look at Anthropic’s S1? For folks who don’t know, that’s the filing document that precedes the IPO.
It contains some of their financial information.

[Tim] I saw part of it, yeah. I didn’t read the whole thing, but I definitely looked at the summaries of it. Anything stick out to you particularly?
[Tobias] Well, the big headline number is the $80 billion loss in the six months to June. That was very impressive. I haven’t seen losses in that, like $80 billion loss and $16 billion in revenue.
I think the initial sort of shock of that loss, it’s not quite as bad as it sounds because evidently, it’s some accounting treatment of the conversion of the convertible notes into equity that creates that. So, they haven’t spent $80 billion in the first six months, $16 billion of revenue. But gee, these are Star Wars numbers.

These are really, really big numbers.

[Tim] It’s a Star Wars game right now. I mean, the cash on the balance sheet was huge. So, they have a lot of cash.
They’re going to do IPO, so they’re going to have a heck of a lot more. They’re in a great position. I mean, it’s an impressive product, an impressive company, but they’re spending a tonne of money.

And to play in this field, I mean, you really have to spend a lot of money. So, yeah, it sounds like they’re going to beat OpenAI to the IPO market. And you know, what’s the pricing power like?

I mean, if you’re an OpenAI user or a cloud user, at what price would you switch over? I don’t know.

[Tobias] I mean, there’s two questions about this. What is your capacity to spend on intelligence? And I don’t know the answer to that either.
It’s incredibly useful. I don’t know if you’d call me a power user, but I’ve been using it pretty consistently for a few years now. And it’s leaps and bounds ahead of where it was 12 months ago.

I looked at something I did 12 months ago using Claude and it’s vastly more usable now, even in 12 months. So, give it five years or 10 years, it’s going to be amazing. Replace me.

It’s incredible.

[Tim] And I’ve seen some people say that it’s not improving productivity for a lot of employees and companies. And it’s like, just wait, just wait. It’s tough to find that many fields.
Now, if you’re a welder or a plumber, that’s a phenomenal field to be in, or in construction. Those are AI proof as of now. But yeah, a lot of the phone service providers and stuff like that.

I remember I got a refrigerator repaired and it’s one of these big refrigerators that it’s not easy to just replace. And I mean, they came like six times and the process would be like the repair guy would call the home office and get walked through what they’re supposed to do. And it’s just like, oh my gosh, imagine the waste of money.

And of course they could never fix it, just had to replace the whole thing anyways. But yeah, I mean, those service centres and things like that are highly vulnerable. So, I think the productivity is going to get better and better for sure.

[Tobias] Yeah. I don’t want to make it sound like I’m bearish on any of this stuff because I think that I can separate the pricing on the stock market of these things. And I think it gets a little bit ahead of itself.
Sometimes it gets a little bit behind and that volatility is just, you could expect these enormous changes that are going to happen to the economy. I just can’t imagine how we get through it without some enormous volatility. But I like science fiction and I’ve been doing a lot of research.

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