Is the AI Gold Rush the new Dot.com?

Post Subtitled: An Ode to Cisco Systems, Inc Investors:

Everybody that went through the Dot.com bubble/burst understands what the author of this article is saying here. How accurate he is remains to be seen.

This article was published earlier today by Lance Roberts - a guy I have semi-occasionally, and none to exclusively, sometimes read his weekly stuff that pops up in my email. He has a decent enough reputation and is considered a legitimate finance guy but is generally on the opposite side of my outlook - which, now that I think of it, probably explains a lot.

Here are some excerpts from his article today:

You can’t turn on the media or pick up the newspaper without a headline discussing “artificial intelligence.” It is certainly reminiscent of the 1999 “Dot.com” chase if you remember that experience.

…the current chase for stocks related to “artificial intelligence” has undoubtedly grabbed everyone’s attention. Retail investors are jumping back into the markets with both feet for the first time since last year.

Most importantly, there is a clear “F.O.M.O.” (Fear Of Missing Out) chase in stocks closely associated with the development and implementation of artificial intelligence.

Moreover, companies also jumped on the bandwagon to make sure they mention “artificial intelligence” in earnings reports and press releases to excite investors. As shown below, the number of mentions of artificial intelligence has soared in recent months.

“Of these companies, 110 cited the term “AI” during their earnings call for the first quarter. This number is well above the 5-year average of 57 and the 10-year average of 34.

In fact, this is the highest number of S&P 500 companies citing “AI” on earnings calls going back to at least 2010 (using current index constituents going back in time). The previous record was 78, which occurred in the prior quarter (Q4 2022).

At the sector level, the Information Technology (38), Industrials (17), and Communication Services (15) sectors have the highest number of S&P 500 companies citing “AI” on Q1 earnings calls, while the Communication Services (75%) and Information Technology (66%) sectors have the highest percentages of companies citing “AI” on Q1 earnings calls.” – FactSet

It is interesting because we saw much the same in 1999 as companies rushed to jump into the “internet boom” that would change the world.

The difference versus today was that companies would advance regardless of actual revenue, earnings, or valuations. It only mattered if they were on the cutting edge of the internet revolution. Today, the companies racing higher on artificial intelligence have actual revenues and income. However, I am sure there will be an explosion of new companies coming to market to jump on the “A.I.” train.

What remains the same is that analysts, and investors, once again believe that “trees can grow to the sky.” The internet craze in 1999 sucked in retail and professionals alike. Then, Jim Cramer published his famous list of “winners” for the decade in March 2000.

The Jim Cramer List of Winners of the new World. (Year 2000)

A Voice Of Reason:

The artificial intelligence craze is likely no different. In a recent interview on CNBC with Roger McNamee, a Silicon Valley investing legend, he made some salient points (via Herb Greenberg):

Today’s things they’re calling A.I., particularly the generative A.I.s – these are just B.S. generators, they have no verified content in them, and the results totally unreliable.
The notion we will apply these to things like searches will result in one lousy outcome after another.

The guys at OpenAI [the company behind ChatGPT] are trying to create the illusion that their actions are inevitable. Yet there is no way to monetize this other than surveillance capitalism – [monetizing user data] – and we know from social media how much harm that causes.

What you’re looking at is a battle between the OpenAI guys trying to create this sense of inevitability and the market saying, “Wait, interest rates are now 5%, it costs half a billion dollars in parts [the cost of Nvidia’s A.I. Chips] to do each training session. That’s too high in a 5% interest rate environment when you have a business with no obvious business model.”[Using chatbots] You have to do fact-checking on a search engine that defeats the purpose of a search engine. That isn’t progress.

While A.I. has enormous potential, the trick is you need to change the incentives. Executives who lead these projects are incentivized to protect those who use them and ensure that the content produces accurate results. Until you see those things driving the industry, the products will suck.

His bottom line, however, is the best…

“There are corporations and journalists that have completely bought into this. Before investors buy into this we should just ask: How are you going to get paid? How are you going to get a return on something that is effectively a half million dollars each time you do a training set… in a 5% environment.”

While none of that matters now, as long as prices are going up, these were the same, or at least similar, problems that faced the Dot.com companies.

The F.O.M.O. Chase Is On:

As noted, the current boom of “artificial intelligence” stocks is just another in a series of “investment themes” over the market’s long term. As Herb noted in his commentary:

“But if we learned nothing else during the SPACs, the crypto, the meme stocks, and whatever else fueled the market’s last run – you know, the one when stocks were the only place to put your money because rates were so low – it’s that when this stuff reverses, it’s always brutal.”

And, as we noted previously:

“These booms provided great opportunities as the innovations offered great investment opportunities to capitalize on the advances. Each phase led to stellar market returns that lasted a decade or more as investors chased emerging opportunities.”

We are experiencing another of these speculative “booms” as anything “artificial intelligence” grips investors’ imaginations.

The Semiconductor Index ETF (S.O.X.X.) recently had one of the most significant daily percentage changes as investors piled into semiconductor stocks linked to artificial intelligence.

Of course, the conversion of bearishly positioned investors into bulls is needed to propel the F.O.M.O. trade higher. Both professional and retail investor sentiment remains more bearishly biased. Such leaves much buying power to move stocks higher as those investors eventually capitulate and chase the market higher.

The Nasdaq, and artificial intelligence-related stocks, are pushing more extreme levels. As shown, the ratio between the Technology sector and the rest of the S&P 500 index has already exceeded the post-Pandemic Shutdown stimulus fueled, stock buying frenzy and continues to look more like 1999.

In 1999, the Nasdaq surged higher, repeatedly pushing into 3-standard deviation territory above the 50-DMA. While the overall trend persisted higher temporarily, the Nasdaq regularly corrected to the mean.

The Nasdaq is once again doing the same.

Of course, during a “mania,” markets do correct. This is why technical analysis becomes more helpful in determining entry and exit points. Over the last 6-years, the Nasdaq repeatedly deviated above its underlying moving average. In every case, a reversion occurred given enough time.

The critical point is that a correction will provide a better opportunity to enter technology stocks at better prices. Just understand that eventually, the trend higher will reverse, so it will be equally important to remember to “sell.”

Cisco Systems (CSCO.) was the Nvidia (NVDA) of the internet revolution. Those who bought CSCO in 1999, and forgot to sell, have never recovered.

However, in the long term, valuations will matter, and they will matter a lot.

Lance is a technical guy and the article makes a much larger statement when read with all the charts and graphs - which, I usually ignore and speed read through the blah-blah. However, every investor has to decide whether a guy like Lance is right or wrong and proceed accordingly to their very own tolerance for risk.

Mr Roberts can be found at RealInvestmentadvice.com

All the Best,
BDH Investing

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I can’t speak to EVERY stock that has somehow been identified with AI… but I DO know that the stock performance of NVDA and SMCI seems to be strongly correlated to actual company performance… and neither stock is unreasonably priced… keeping in mind that… for growth companies… PE and PEG need to be evaluated against FORWARD earnings, not by watching the rear view mirror.

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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Whether you are a Bull or a Bear it’s always knowledge worthy and perhaps valuable to hear and consider the other side of the story.

Agree completely on SMCI - On NVDA agree longer term - not all that sure short term. Anyway, I don’t think that lance is referring to older
established companies with decent track records; rather, perhaps all the Johnny-Come-Lately folks perhaps just tagging along for the ride.

DEAD SKUNK IN THE MIDDLE OF THE ROAD - YouTube

All the Best,
BDH Investing

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Yep. I find there’s a pretty good combo of plus and minus articles at Seeking Alpha… and I read the comments too, looking for thoughts/ideas.

Heck, I even read stuff by some guy claiming to be at some sort of abandoned arctic outpost… as crazy as that might sound. LOL

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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My goodness Rob - no sense scrapping the bottom of the barrel!

All the Best,
BDH Investing

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Rob:

I feel as though edification, illumination, and clarification are needed here, to wit:

My reference to Dead Skunk was not directed toward you - it was in reference to all the tag-a-long AI companies who will perhaps ultimately be road kill. I realize now that its inclusion without direct correlation could easily lead to misunderstanding.

Please know I hold you in the highest of esteem; albeit, on a pro-rata basis.

All the Best,
Angelo Fachello

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That never occurred to me. :smiley: No worries.

I never assume my companies will always do well. Even the best of companies, AI or otherwise, can lose their way…pull bone head (had to separate the word because the Fool filter wouldn’t allow it as one word… lol) stunts… have an unexpected bad surprise. Whenever we hunt for fast growers… there is a significant risk of something bad happening. Definitely not “buy and forget”. Except maybe MSFT or GOOG or AAPL… none of which I’m smart enough to buy… or so it seems. :slight_smile:

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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Showing Jim Cramer’s mistakes is a layup for Michael Jordan with no one else on the court. It’s a chip shot for Tiger Woods with a hole the size of a bathtub. It’s … Too easy.

The highest P/E Cisco ever achieved was 171. Remember that number.

NVDA’s P/E at the moment is over 200. (Forward: about 50). Cisco was quite profitable during the 1990’s. (Heck, AOL was profitable in 1999.) That performance didn’t help with the stock price much after that.

I believe I’m the only person on planet earth who lost money on Apple and on Google. (I have both again, but there was a time when…) I made money on Microsoft back in the 90’s, but haven’t had it since.

Anyway, nobody really knows what AI is going to do or be (the analogy would be “the internet in 1995”) but you know it’s going to be something . That makes it dicey for an old phart investor like me, but I understand the thrill of the hunt. I played the game - and quite successfully - in the 90’s. Then sold everything, sat back, and re-entered a couple years later with the “protect my pot” mentality rather than “the thrill of the game” mindset.

Anyway, 200 p/e scares the bejezus out of me. I remember doing forward p/e’s too, and a couple of them came true. Many did not, and thus ended an unhappy time for many investors of that decade.

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I’d say my earlier statement pretty well addresses your later one.

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

Regardless of anyone’s outlook on AI I think you have to ask yourself if todays market - at this very inception point - is worthy of risk-on investing. Sure - the market is trending upward and May was a good month; however, its certainly not a fully grown Bull and with a lot of headwinds is more like this:

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwiswuXSuar_AhVYm2oFHZZhDywQwqsBegQIDxAB&url=https%3A%2F%2Fwww.gettyimages.com%2Fdetail%2Fvideo%2Fnewborn-thomsons-gazelle-standing-shakily-trying-stock-video-footage%2F582-54&usg=AOvVaw2mPmRnKADtSlUPPUkNQnyG

Two things can happen here: 1) The market continues to gain footing and momentum; or, 2) The Lion or another of the Macro headwind predators eats it.

Simplistic viewpoint? Sure…but I am trying to control my George Armstrong Custer investing tendencies; hence, I wait. I think the market is gaining with a full Bull tendency - but even so, AI, at this point, is the very definition of risk-on investing.

All the Best,
BDH Investing

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I follow cem kar … his view on market right almost 3 times in last 2 years …

He also predicted this bull run 1 month before and expecting some sell off now because of liquidity and every one onside after another 3 to 5% up
His explanation very hard to understand but this video is easy to understand… worth to watch ., please listen one time

Any how we never care these but we follow price so nothing to worry

I added Spxl short little with my margin … any reason if we get some pullback helps little .

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Like the real Gold Rush, those that consistently made money were the ones selling pick axes and shovels to those looking for gold. So with AI, who is making the pick axes and shovels?

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This is what the whole NVDA craze has been about. NVDA designs/creates the compute hardware (“pick axes and shovels”), and other companies will build AI models (“gold”) that need those chips.

You could argue that the foundries (chip manufacturers) or suppliers are better positioned than NVDA, but they’re all in the “pick axes and shovels” side either way.

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Hi CharlieHustle:

There is a wealth of things to be discovered about AI but there is one thing I absolutely believe know for sure: Pete Rose belongs in the Hall.

All the Best,
BDH Investing

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Ain’t that the truth

Interesting take on the NVDA ER pop that fizzled.

Inside the numbers…basically claiming that companies are being invested in (given loans/financing) by NVDA or Blackrock, and then using that investment to buy NVIDIA GPUs.

Not saying anything illegal here, but not all these AI bets and investments will pan out, and a lot of hot air may be expelled as a result. I have no doubt that a few companies will unleash the truly world-changing AI apps. My take is that these are likely Siri/Alexa but on AI steroids, essentially becoming our personal “AI assistants” across any device we choose (phone, tablet, laptop, watch, auto, tv, refrigerator…any IoT application with sensors or microphones or screens, really).

Whether those eventual winners are Apple, Amazon, and Google with personal assistants, or META for personalized ad-related or as AI Avatars unleashed into the future Metaverse, or integrated into MSFT office and Azure, or just simply some startups we haven’t even heard of yet.

But NVDA is really the picks and shovels…not the end game. Eventually, all “infrastructure” tends to get commoditized, it seems. So like CSCO still being a networking leader (and more) all these years later from 2000 stock collapse, NVDA isn’t going anywhere, but it doesn’t mean that it’s stock couldn’t face a similar collapse or just head sideways for multiple years as the demand rationalizes.

Gonna be interesting, either way.

Dreamer

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