AI Or Crash: A "Show Me The Money" Attitude Starting To Emerge
AI can trade down too
The AI trade is under increasing scrutiny. The average stock involved in the infrastructure build-out of AI has returned 26% YTD, but stocks with enabled revenues fell by 19% between February and May. Goldman says that investors are increasingly concerned about the potential returns to the hyperscalers' AI investment spending.
Source: Goldman
Similarities between the current melt-up & the late 1990s
The market capitalization of S&P 500 Information Technology and Communication Services sectors has melted up to 42.4% of the S&P 500, exceeding the 40.7% peak during March 2000.
Source: Yardeni
AI or crash....
Slightly exaggerated but still sort of real...
Source: i3 Invest
Considerable uncertainty about the timeline
Goldman's conversations with investors have been defined by skepticism about latter stages of AI adoption.
1. Even among investors that are long-term bullish on the potential gains from AI adoption, there appears to be considerable uncertainty about the timeline.
2. Our economists' latest AI Adoption Tracker shows that only 5% of firms are using generative AI to produce goods and services. (GS)
Valuation has started to contribute to NVDA return
Since the start of 2023, 97% of NVDA's return has been driven by greater earnings (vs. just 3% from valuation expansion). However, year to date, NVDA's NTM P/E ratio has increased from 25x to 42x (+70%), accounting for 56% of the 165% YTD price return.
Source: FactSet
"Slowing"
NVDA revenue growth is expected to "slow"....
Source: Goldman
Also "slowing"
AI-exposed mega-cap tech stocks are also expected to see growth slowing...
Source: FactSet
Sales revisions back then...
Sales revisions will be a key indicator for investors to assess the durability of the AI trade. While sales and earnings collapsed for the many TMT firms in the late 1990s, other TMT stocks such as MSFT continued to deliver positive sales growth, just at slower rates than analysts expected. The failure to meet these expectations led to sharp cuts in valuations and share prices. The situation today is nowhere near this, but so consider this just a friendly reminder of what COULD happen. Chart shows sales revisions during the Tech Bubble.
Source: Goldman
Required then and now
Required earnings growth to maintain recent "ROI". Also just a friendly reminder that sometimes dreams don't come true...
Source: Compustat
Prepared to wait 14 years...?
If you bought the Nasdaq in 1999, you made nothing for 14 years then 5x'd your money in a decade.
Source: Tidefall Capital
Cute anecdote on AI in healthcare
"At CNBC, in a prior career, I covered an upstart health plan that really believed that tech - specifically machine learning/AI - would be the core lever to drive behavioral change for its Medicare population. That would improve outcomes & drive down costs. The plan hired a whole data science/engineering team with that thesis and raised tens of millions from tech VCs. I recall speaking to the employees some years later, many of whom were looking for alternative roles at software companies. Can you guess what the most effective intervention was of everything they tried? A nurse visit to the home. Nothing else compared." (Christina Farr)
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