Technology You Don't Understand to Build Products You Don't Need
We seem to be rushing toward an incomprehensible future.
I've been thinking a lot about the broader macroeconomic landscape and how AI has driven the stock market to record highs.
US stock markets closed at record highs on Friday powered by investors' continued enthusiasm for artificial intelligence (AI). Both the S&P 500 and the tech-dominated Nasdaq set records, with the Nasdaq passing its last peak in 2021, driven higher by gains for Facebook owner Meta and Nvidia, the leading AI chipmaker.
Technology You Don't Understand
As hinted above, most of these gains have been driven by one company: Nvidia.
Do you think the average person could tell you what Nvidia does? Do you think the averageinvestor could give a more cogent answer than spitting out a couple of buzzwords likesemiconductor, fast, artificial intelligence and the future?
I tried to find a succinct description of Nvidia’s business, something an idiot like me can understand, and boy was that difficult.
There’s this from PC Mag:
A leading designer of graphics, AI and high-performance processors. Founded in 1993 by Jen-Hsun Huang, Chris Malachowsky and Curtis Priem, NVIDIA launched its first multimedia processor, the NV1, in 1995. NVIDIA is a fabless company (chips are made elsewhere) that is known worldwide for its advanced technologies. NVIDIA graphics chips with brand names such as GeForce, Quadro, Titan and Tegra are built into the computers of many vendors. NVIDIA AI chips use designations such as DGX, HGX, A100 and H100 (see H100 and NVIDIA DGX).
https://www.pcmag.com/encyclopedia/term/nvidia
Sounds complicated! Intimidating, even!
Don’t get me started about the average person trying to describe artificial intelligence. You’ll get definitions as wide as “robots taking us hostage” to “pretty soon no one will have to work because our computers will do all our menial and rudimentary tasks.”
It seems pretty apparent to me that all future technological evolution has been thrown under the umbrella of AI – and Wall Street has been able to monetize that broad categorization.
An old Peter Lynch quote comes to mind:
“There seems to be an unwritten rule on Wall Street: If you don’t understand it, then put your life savings into it. Shun the enterprise around the corner, which can at least be observed, and seek out the one that manufactures an incomprehensible product.”
Products You Don't Need
The thing about the AI boom that I have yet to see anyone discuss is just how little the average American will use these new “tools” recreationally.
Yes, we’ll all likely be forced to incorporate certain artificial intelligence in our work lives. Our corporate overlords will force us to do so as they are sure it will drive down their costs over time (and probably drive us out of our jobs in the process). I have no doubt this will ultimately be true – it has been the case since the Industrial Revolution when man stopped breaking his back in his own fields and instead decided to work for someone else. Advancing technologies will always create a restructuring of labor.
But how many people are going to let artificial intelligence drive their cars for them? How many people need ChatGPT to write a paper for them after they graduate college? How many grandparents need a computer to write their conspiratorial Facebook posts for them? My guess is very few.
I know the use cases for AI are limited now and that they will grow in the future to encompass things we (or I) can’t currently imagine. But my bet is there will be a backlash to this technology just as there is currently a backlash against smartphones and social media:
High levels of smartphone addiction were correlated with low self-esteem, loneliness, depression and shyness.
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5970452/
Too much time on social media apps can lead to an increase in body dissatisfaction, eating disorders and low self-esteem. While this is particularly concerning for teen girls, reports show that 46% of teens 13 to 17 years old said social media made them feel worse about their bodies.
https://health.clevelandclinic.org/dangers-of-social-media-for-youth
I’m not naïve enough to think any of the above really matters in the grand scheme of things. This technology is coming whether it is a net-positive for us or not. Silicon Valley will continue to push the limits, and Wall Street will continue to reward it.
I’m just not sure the future Wall Street has baked-in to current prices is here yet.
I will admit to having a predilection for being risk averse. A more accurate description might be that I’m a Debbie Downer. When too many people are having fun, I have to look for a way to ruin it.
Reading yesterday’s post by
pushed me over the edge. (subscribe to his Crossing Wall Street newsletter as soon as possible):Here’s a look at the yield on the 10-year Treasury (in black) along with the S&P 500’s earnings yield (in purple).
Here’s how it works, or at least how it’s supposed to work (my apologies for getting mathy).
Take the 10-year Treasury yield. Right now, that’s around 4.25%. Add 2% to that for the risk premium (so 6.25%). Then take the inverse of that (1/0.0625 = 16) and that should roughly be the stock market’s price/earnings ratio. In this case, that’s 16.
Except, right now, it’s not even close. The stock market’s current price/earnings ratio is currently at 24. That’s roughly 50% higher than where the model thinks it should be.
https://www.crossingwallstreet.com/archives/2024/03/cws-market-review-march-26-2024.html
Eddy goes on to talk about where Reddit is trading a week after its IPO:
I wanted to show you just how extreme some of the valuations are. Let’s take a closer look at Reddit’s business.
Last year, Reddit had revenue of $804 million and operating income of negative $140 million. In other words, the company is running at an operating loss. Add in $50 million in other income and Reddit lost about $90 million for the year. That works out to minus 57 cents per share.
Despite running a loss, shares of Reddit were priced at $34. Once trading started, the shares took off. Earlier today, the stock came close to $75 per share. That means the business is trading for more than 130 times its loss from the year.
I understand that one shouldn’t value nontraditional companies with traditional metrics. Still, at some point, one has to view this as extreme. This is exactly what happens when the equity risk premium goes to zero. When being risky pays off, the market will follow what’s working.
Reddit is worth $75 per share in the same way cocoa is worth $10,000 per metric ton, or the S&P 500 is worth 24 times earnings.
“The voice of reason is small, but very persistent.” — Sigmund Freud.
I’m not someone you should listen to about investing decisions. Hell, even if I were, I’m not one to try to “time the market.” I’m not advocating anyone sell their equities and run to the hills with their cash in a duffle bag. It’s better for everyone to keep buying, all the time, always. There is always light at the end of the tunnel.
However, it seems apparent to me that, if you consider yourself a “value” investor, or someone who tries to pick individual stocks, now is the time to build your cash reserves. I’m not going to call it a bubble, a correction, a recession, or anything else, but there will be a future date where you will get more bang for your buck. When that happens is anyone’s guess.
That’s all for now,
Tyler