It’s amazing how things have changed over the years. In 2019, while I was traveling to a few countries, I got tired of traveling each year at year-end and told myself, “This is getting tiring.”
Lo and behold, the four years that followed were nothing short of crazy. Starting with COVID-19, which I discovered earlier than others in the world thanks to my proximity at the time to the point where the outbreak was first discovered, followed by one of the most rapid stock market crashes I’ve ever experienced in my life, and then one of the most rapid stock market rebounds ever driven by the decisive action taken by the Fed to lower the interest rate to 0%.
Since then, we had SPACs, and even SPAC Jesus going on live TV, followed by Crypto, from Bitcoin, to Ethereum, to Dogecoin, to Shiba Inu coin, followed by NFTs. Don’t forget, everyone was buying TSLA stocks back then.
The Fed then embarked on (at least) the most rapid increase of interest rates in my life, raising the rate from 0% to 5.25%, and suddenly all that madness started disappearing. I rarely hear about SPACs or NFTs anymore. Bitcoin dropped to $18k and has since bounced back up. The only use case of Bitcoin that I can think of is for evading taxes, but I won’t go there.
Then in 2022, we had GenAI.
Coming from a computer science background, I’ve heard about AI and how it has evolved from its early days as applied statistics, to artificial intelligence, machine learning, deep learning, and now Generative Artificial Intelligence. It’s quite neat; you have a tool that can basically provide you with answers as if you’re talking to some assistants in a non-programmatic way, unlike Siri – which feels pre-programmed.
At first, no one knew what it was capable of, but in the 1-2 years that followed, it was, again, nothing short of crazy.
Every tech company seems to be building its own model. VC funding goes towards AI projects. If you have a real business and are raising from VCs, the question you will get asked is, “Where’s the AI? Our IC won’t be approving it if there’s no AI angle.” AI businesses are raising tons of money at incredibly high valuations.
I always wonder what they put in the business plan. It’s probably: “I need $100 million on a $500 million valuation (because you typically give 20%) to train the model that I am building, and I need lots of NVIDIA chips and compute power for that.”
NVIDIA stock soared, followed by other stocks which has AI direct and more recently, second/third/n-th order effect, from the chip manufacturer, to the server builder, server rack provider, to even the energy provider for the data centers. Companies start mentioning AI in their quarterly report, from software provider, to probably restaurant operators, apparel companies, retailers. The stronger reason is not because they are actually benefitting from it directly (or even indirectly) in a meaningful new way since GenAI, but it is because their stock price will get punished if they don’t mention it.
Recent writings by Goldman Sachs and comments from top company leaders have shed some more light on this matter. Skeptics start asking about the ROI on these capital expenditures related to GenAI. While that remains questionable and time will tell, top company leaders start mentioning their true intention. They invest in this because the risk of under-investing in it is higher than over-investing. Which is another way of saying, I also don’t know the ROI, but if I don’t, then I have a risk of going down.
That doesn’t sound like a good thing to bet our own money on, does it?
This exact reason has driven NVIDIA to be one of the most valuable companies in the world. A simple way for me to determine whether it belongs there or not is:
Do you use it every day?
I use Apple iPhone, communicate on WhatsApp and Instagram, use Google search engine, MSFT Windows and Excel spreadsheets, watch Netflix, buy things on Amazon (and recently subscribed to Amazon Prime), and billions of others do. I believe billions of people in this world have never even seen an NVIDIA chip, yet they buy the stocks. This is very similar to where TSLA was back in 2020-2021 when people thought that everyone was going to drive multiple Tesla cars and have their homes powered by the Powerwall, and so on. Yet, nowadays, a lot of companies are going back to building gasoline cars.
I belong to the camp that truly believes that AI is going to change how we live for the better, like other inventions such as electric cars, mobile phones, the internet, gasoline cars, electricity, and oil. At the height of the internet bubble, you had hundreds of companies doing internet-something, and I don’t see them existing anymore now. Back in the day, you had hundreds of car companies; nowadays, you have only a few that are still standing.
I don’t think it is wise to bet against the excess, but for sure it feels excessive, and anything excessive will normalize.
Time will tell.
Link to the Goldman Sachs Report: https://www.goldmansachs.com/intelligence/pages/gs-research/gen-ai-too-much-spend-too-little-benefit/report.pdf
Link to the Berkshire Hathaway Shareholder Meeting 2021: https://finance.yahoo.com/video/2021-berkshire-hathaway-annual-shareholders-142101852.html