It was a nice trip.
We had a nice meal, drank a few fancy cocktails, played some blackjack and talked about artificial intelligence with a few hundred financial advisors.
On stage, we took a deep dive into what’s going on with the world’s largest companies and their pursuit of AI supremacy. You can listen to the audio of the podcast here:
If you weren’t among the lucky ones at the MGM Conference Center that day, I thought it would be helpful to offer some of the slides we covered in our presentation.
First we talked about the shift from investing in intangible to tangible assets by the big tech companies using Meta’s new Hyperion data center as an example:
These companies believe that AI is worth the investment, but this is a risk and a change in their business models.
The hyperscalers’ expenses continue to rise, rise and fall:
How long will stock market investors allow this? The companies that spend money are given the benefit of the doubt that this will all pay off. I wonder when the market will want to see a big ROI on this spend.
The size of these companies is astonishing:
The Mag 7 stocks are now as big as the bottom 449 stocks in the S&P 500 combined.
It appears we have entered the new normal of stock market concentration:
At least for now.
One of the reasons for this is that the fundamental factors correspond to the price gains on shares:
Nvidia is now the largest company in the US stock market, but its fundamental growth has outpaced its price growth since the release of ChatGPT.
Analysts expect growth to continue:
Is it possible that a $5 trillion company can grow at this insane level for so long? We’ll see.
Here’s a real face-blower for you:
Apple and Nvidia alone are now worth almost as much as the healthcare and consumer goods sectors combined.
Here’s another one for you: The market cap of Mag 7 stock is now as large as that of the energy, materials, consumer staples, healthcare, financial services, utilities and real estate sectors combined.
There have been cases of stock market concentration in the past. But we have never had such efficient companies.
If you take this efficiency into account by adjusting valuations to changes in margins, the market doesn’t seem as expensive as you might think:
One of the biggest questions of the AI boom is how much the other companies that don’t make these investments will benefit.
Outside of technology, the margins are much smaller:
Will AI improve productivity enough that some of these other companies can increase their margins? That would be something.
And finally – the question everyone wants to know – will this end badly for these huge companies?
The Mag 7 is no stranger to crashes this decade:
As expectations spiral out of control, will we see some or all of these stocks crash?
And what does a crash look like? A 20% drop is nothing. Meta is currently down over 20% from its highs:
Are we looking at a 40% crash? 50% or more?
Would the bursting of an AI bubble provide a great buying opportunity because these companies are still better at what they do than everyone else?
Or what if these companies see results sooner than we think and the gigantic crash never happens?
I have three words to summarize my conclusion on this matter:
I. Don’t. Knowing.
If anyone tells you he or she knows how this will turn out, he or she either has a horrible case of hubris or just wants to have their investment policy proven.
I am open to a wide range of outcomes in this area.
Further reading:
The biggest risk and the biggest opportunity
#Las #Vegas #wealth #common #sense