Market Musings 270523: Is AI The Next Big Thing (for Investors)?

27th May '23 by Edmund Shing

18 comments 2258 reads

Market Musings 270523:
Is AI the next Big Thing (for investors)?

Nvidia’s post results surge underlines the hype over ChatGPT and AI

Summary:

Artificial Intelligence: A Bubble, or the Next Big Thing?
Gartner’s Hype Cycle
ChatGPT the trigger for AI excitement
Nvidia the Poster Child for Investing in AI
If you want to invest in AI, how else can you invest apart from Nvidia?
Finally, what could the macro impact of AI really be?

Weekly Podcast:
The US debt ceiling: the final countdown

Is 1 June a scary date?
Can the American President really invoke the 14th amendment?
Why are CDS prices so high but the probability of the US default is not?
Why is the T-bill dislocated?

Artificial Intelligence: A Bubble, or the Next Big Thing?

There is no doubt that there is a huge amount of hype in today’s financial markets around the theme of Artificial intelligence (AI).

While AI has been around for many years (I myself completed a Doctorate in Artificial Intelligence in the early 1990s), the technology finally seems to be hitting the mainstream in terms of applications in the everyday and business worlds.

For many in Main Street, the image of Artificial Intelligence is perhaps best personified by the risk that one day, computers will rule over people, Terminator-style.

However, I would rather argue that Artificial Intelligence and Machine Learning are technologies that can potentially magnify once again the impact of Information Technology on our everyday lives, after the advent of the Internet/World Wide Web and then of Smartphones.

Of course, as Artificial Intelligence captures the imagination of investors in much the same way that the Metaverse did a couple of years or so ago, there is always the risk that investors today will price in over-optimistic sales and earnings expectations. This is a hype pattern that repeats itself over and over again, as it has done for over a hundred years in stock markets with former “technologies” such as railroads, radio and mainframe computers.

I am not saying that there is no solid reasoning behind this excitement. For instance, consultancy PwC sees AI-related productivity savings and investments generating $15.7 trillion worth of global economic output…

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Silver Moon

28th May '23

Edmund, Statista's graph shows ChatGPT at just 5 days old, what the membership will look like in 6 months time? I've just completed re-reading Ed Croft's 'How to Make Money in Dividend Stocks' and now bought Stephen Wolfram's 'What is ChatGPT Doing.....' and am wondering if I could put the two together somehow. Thanks for such an interesting article, Silver

Paul Hill

Agreed Edmund

Nvidia share trade on 24x EV/sales.

To me, this looks nuts - especially given by 2030 Quantum Computing MAY have disrupted the GPU, CPU & chip market.

Investors don't just own today's profits, but every years.

Harry Hindsight

Great common sense thanks. I've avoided ETF's on the basis of my superior stock picking skills, but as that was in my mind and not reality time to consider starting that journey. Mindful of not duplicating i.e. holding Shell etc and SPDR MSCI Europe Energy UCITS ETF (LON:ENGY).

Looking at Global X Telemedicine & Digital Hlth U ETF USD Dis (LON:EDOC) and Global X Robotics and AI UCITS ETF USD Acc (LON:BOTZ). Of course there are iShares, Wisdomtree, L&G etc and will review your older articles.

Have read that ChatGPT free use is not up-to-date, so presume huge upside when Microsoft (NSQ:MSFT) eventually sell the app or packages with their Office 360. Seems to have first mover advantage, but not going to chase higher, although 'ceilings' don't seem to apply in America (expect a boost next week but then what do I know). See China is now making their own airliner - the world is a changing.

BnB

Nvidia was a great investment 6 months ago but is a much riskier one today, at least over horizons of a year or two. We may or may not be in a bubble - no one really knows - but the chances are that investors have overestimated the transformational qualities of AI in the short term. I do see remaining opportunities however outside bubbly semiconductors and big tech.

The coming AI world is going to produce ever increasing amounts of data that places ever growing demand on high power computer facilities. Moving the data around requires leading edge switching within data centres. I invest in Arista Networks which already controls 30% of the advanced switching market, worth $500m today but expected to increase 13-fold in the next 4 years.

Arista ran up hard when ChatGPT emerged, only to fall when they revealed an uninspiring recent quarter. However, the huge orders recently placed with Nvidia by the hyperscalers points toward strong momentum for Arista in the near future and the stock has run up to highs again. Even so, the valuation remains unintimidating to a tech investor - not cheap, but below its historical level, and WAY better value than Nvidia. It's a fairly volatile share so it might be worth looking for an entry.

Another opportunity where valuations are actually low is to invest in the providers of digital transformation consultancy. These have all suffered on macro worries but they will become essential partners for corporates to navigate their transition to an AI world. I hold a basket of these across the developed world.

WarrantStar

Hi Harry. Please can you elaborate on your comment that "ChatGPT free use is not up-to-date, so presume huge upside when Microsoft (NSQ:MSFT) eventually sell the app or packages with their Office 360" I don't see any reason to expect a premium for being behind the curve. Or why anyone would pay to use it at all. Right now Google Bard is collecting data from the internet to give completely up to date information on the questions that are presented to it.

Other than 'nobody does something for nothing' I cannot answer. A simple 'google' search says:

ChatGPT vs Google BARD: What powers them? The key difference between ChatGPT and Google BARD stems from the Large Language Models (LLM) they employ. OpenAI's ChatGPT uses the Generative Pre-trained Transformer 4 (GPT-4), while Google BARD relies on its bespoke Language Model for Dialogue Applications (LaMDA).

Buffett says (or Munger) "if don't understand it don't invest" but who has that ability - you'd only invest in Tesco because you use it often and like it. Hence I'm a chartist - it goes up, it goes down - like the Old Grand Duke of York.

My point poorly worded was that 'data' becomes valuable - and who has the data. The NHS has shed loads but dysfunctional. YouGov (LON:YOU) it and of course the government (but don't seem to use it very well).

But on AI generally the old adage ' garbage in - garbage out'. No insights sorry just saw Edmunds post as no responders so opened the conversation - don't rely on me for investment advice.

I dislike Microsoft (NSQ:MSFT) due to history of PC crashes, resource hungry software, constant updates and authentications etc etc but there are not many CV's or powerpoint financial presentation that are not produced by their software - so suck it up of become irrelevant. The war with Alphabet (NSQ:GOOGL) will be one to watch, but sure they will be masters of the universe one day.

29th May '23

Unusual close correlation between RBOT (iShares) and BOTZ (Global X) ETF's.

Cuddlesticks

Super article Edmund.

Whilst I've never invested in Cathie Wood's Ark I do find some of Ark's videos insightful.

The video below is an Ark interview with Cerebras. They have an alternative approach to using Nvidia chips - interesting even if the video may be partly driven by Ark famously selling Nvidia last year. Still it's good to know Nvidia is by no means the only game in town....

I also like how Cathie Wood defines the characteristics of the winners in AI in the interview below...

Alphaflight

With all due respect, any article talking about AI that fails to mention Deepmind in London (owned by Alphabet) and their various AlphaGo Algorithm iterations is missing a key point. The AlphGo Zero is the closest thing we have to artificial general intelligence (AGI).

I like Ms Wood's comment - economic statistics are both lagging and wrong. Look at what companies are reporting and not what the 'experts' are flouting. Maybe we need AI more than ever for the Worlds benefit and get rid of all these taxpayer funded numpties playing with spreadsheets all day long in between home working 'walking the dog'.

peterthegreat

I must admit that the reason I invested in Nvidia a few years ago had little to do with AI. I invested because the company has an excellent ROCE which may well derive from its strong IP which has made it possible for the company to exploit a range of sectors including gaming and cryptocurrency. The hype over AI may well dissipate with a fall back in Nvidia's share price, but I would expect the company's ability to innovate will enable it to exploit other sectors which are not yet the focus of attention.

Monty Carlo

30th May '23

Thanks for the pointer to Wolfram's commentary on ChatGPT.

What I presume is an abridged version of the book you mention is available to read for free on his website, no purchase required. You still need to put aside a couple of hours, but very informative.

Whilst Wolfram has his own commercial interests, I don't think they intruded too much in the piece I was reading.

andrewdb

Courtesy FT Alphaville 11/09/19:

We’ll leave you with this, a quote from Sun Microsystem’s founder Scott McNealy. Having watched the stock of his company appreciate nearly 14-fold during the dotcom bubble, and then collapse 95% during the bust, McNealy was bemused that investors ever considered paying what now looks like a rather diminutive 10 times sales for the computer hardware company’s stock at its peak in 2000.

Why? This is what he told Businessweek in 2002:

(https://www.bloomberg.com/news...)

At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realise how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

10 times sales…

Meryln cousins

15th Jul '23

Very good sir.

William K

17th Jul '23

Thanks Edmund. Meticulous and insightful as always. I bought Nvidia a few years ago, purely because it had great momentum and looked like it had the potential to be 'disruptive'. To be controversial, I don't think the fundamentals are a key consideration for a company like Nvidia. The chart is a classic cup and handle in the making and I think it could go a lot higher. I do agree AI is in a bit of a bubble at present, but the top US technology stocks (Google, Apple, Microsoft & Nvidia) are likely to be market leaders for the next decade IMHO.

Snowbum

19th Jul '23

Alphawave IP (LON:AWE) (I hold) is worthy of consideration in this space too…. It occupies an interesting niche in terms of connectivity. I have no wish to try and explain but for those interested there was an excellent link to a summary posted in comments by Stocko reader’ tonybyrne’ here:

https://www.stockopedia.com/co...

kuronagi

Here is another good explanation of Alphawave IP (LON:AWE) found on another Stocko thread

https://hakastocks.substack.com/p/alphawave-semi-a-data-center-play

Since return from suspension on May 22nd, I have built up a decent holding. It is the only new stock I have added to my portfolio in the past 4 years (NB excluding additions for sectoral reasons).

Three big advantages

a) There have been significant changes (acquisitions etc) in the past year which may not be reflected in estimates

b) It is hard to understand what exactly the company does

c) So far, it appears to be off the radar of most PIs.

The stock was brought to my attention by another member of the investment group in my area. He knows well both the company and its products.

Monty9

20th Jul '23

That is an excellent summary, thank you!

Market Musings 270523: Is AI the next Big Thing (for investors)?