Is the AI Rally a Bubble? Ram, Chris, and Austin Disagree

Transcript

It's just AI. The entire market is explained by AI. AI picks and shovels AI infrastructure. Names like Micron and SanDisk and CN and Lumentum and industrials linked to it. That's it. It's been extraordinary. The movement you've seen like Micron which is doing a 10x in public markets as a large cap security is unprecedented.

It's extraordinary. And you can make the argument that Micron is still cheap at a forward P of eight times. And South Korea also has been running. That's it. It's like uh you know, you've seen those movies where the tsunami's coming all the water drains from the beach and you can walk deeper into the into the ocean. That's what's happening. It is It is really extraordinary. The last time I saw this was when Nvidia re-rated in May through July of 2024. The capital is flowing from everywhere else.

Doesn't matter what else. Into this theme. And you've got record call option activity record 3x levered ETF activity. And uh yeah, it's a it's a truly extraordinary market phenomenon that we're seeing. Overall, I mean like it's a bull market. That's the main takeaway. Like what matters? Well, it's a bull market. That's the main takeaway. And it's creating opportunities elsewhere in the market, too. The main risk you have is whipsaw risk. Right? And everyone has anxiety. Right? If you own semiconductors, you say, "Am I supposed to sell now?

Because I'm up 80% in 3 months? Or if I don't own it, do I buy now? Cuz nothing's working except AI." It's max anxiety, max frustration, max FOMO, max fear. You know, the the market's are extraordinary animal here and it is just put everyone in a vise with this with this semiconductor rally. Semis are now 18% of the S&P. It's never been higher as a market cap. The last time we had this record was 11% in 2014. Well, all right. So, this leads me to two schools of thought that I've been watching. One, I'll phrase it this way because this goes around on on Twitter as a quote sometimes is not enough people are

emotionally prepared for this not to be a bubble. Right? We'll put that on one side. On the other side, the last time we saw price action like this concentrated in a single sector in the United States was probably 2000. And we all know how that ended. So, Chris Rom was talking, I'm going to throw this one to you. If you had to pick between one of those two archetypes, which one are you? It's not the same. Um you know, back back in the crisis, we were making bubbles were being made about things without utility. It was um engineering on top of engineering. Um and I was there and there was just a lot of just I guess I see more fundamentals here and

I see more fundamental innovation here. AI is changing our civilization as we know it. It's unlocking democratization of knowledge. It's It's going to facilitate new innovations across every single discipline. So, so there's real fundamental value here. And there is an absolute arms race and again, we're seeing the United States take the lead again, which is which is another reason why we're outperforming. Not only with AI, we're outperforming with the energy and everything else and it's all correlated.

But like all things in markets, you end up going to extremes at a certain point. I don't know where we are in that cycle just yet. We will go to an extreme. There will be it will pop. like we had the same thing with the dot com bubble where man, this is amazing technology. It's going to change the world and it did. Like look at us now. Look at us now. But near term it did hit a bubble. Look, I I I still think that you I still personally think we're on the trajectory up because the amount of investment that's going into infrastructure and and and we're still coming up with new innovation after new innovation uh in real time. So I don't think we're through it yet.

This is not a bubble. See a lot of people talking about this. It's it's also very clearly not a bubble. It's the anxiety. We're not going to live through the dot com era because people have lived through the era that are still managing money today. Also markets markets learn. Like the valuations in the dot com era were truly nutty. Like the globe.com went public and on the IPO day went up 600% in a day. There are companies like GeoCities that went public. The bankers that are now they were taking public as stories around that and JP Morgan.

Uh yeah, these are real businesses and you don't have the dark fiber issues with the dot com era. So you can say GPUs are the dark fiber. Now that's like the the analogy. The difference is back then the dark fiber was being so over investment by telecom and venture back startups. Here the primary spender are the most profitable companies in the world, number one, two, increasingly governments. And those profitable companies are showing a return on that through their cloud business. Like Google's cloud business grew 60%. Microsoft's cloud business grew 40%.

So they're making money on that. There are counterparty questions around open AI. But Meta just assumed a a contract. They stepped in and said, "Hey, we'll take that data center lease." So the demand for computer is so high uh that it's hard to see how you see the capex cycle breaking down anytime soon. Yeah, the other thing I think we're in an interesting era now because of the lack of regulation, it allows for innovators and startups to jump in. Uh, but you're starting to hear more and more about regulation. I think that will scare a bunch of people.

Um, and to the extent that we start seeing regulation in the future, maybe not this administration, but the next, who knows, it's going to be a huge consolidation force where with my experience, once you have a regulation, the bigger already really big, the big are going to get even bigger, and there's going to be even more consolidation. So, I'm hopeful now that we see a couple of these startups bust through uh, before they're they're absolutely put out of business through that fixed cost of sorry guys, you have a new model, you have to get it approved. Oh, but mine's already approved cuz I, you know, I've been doing it for 5 years. Um, Here's another fun one for you.

I know you, Chris, you're on the venture side. Prior to current role, uh, maybe doing venture now here, too, but here's a fun fact for you. There are 63 unicorn AI labs billion-dollar valuations, like Thinking Machines founded by the former CTO of OpenAI, Ilya's got one. None of them make a penny of revenue. So, there is a bubble, it's just in private markets. Public market investors have exercised far more discipline, and yes, in public markets there issues, too, like Caterpillar's not worth 35 times earnings rate. It's private markets.

That's where the bubble is. Um, the other fun fact for you is that the number of these LLMs that are in Europe is zero. It's zero. I'm trying to ask like, which is the scarier fact? That we have 63 unicorns that don't make any money, not a penny of revenue, or that Europe has none. I'd rather live in the former. I'd rather have the the innovation borne by venture capital investors that are subsidizing the public good for everybody else. Hopefully, they'll make money on that. I doubt it. Amazon didn't make money till it did.

Either right? And well, another theme from 2000 though, and actually one we've talked about with blockchains before, too, is that the value may be large, but are we attributing value accrual to the right people? Because Ram, to your point, OpenAI may be stepping away from contracts. We may have a number of model companies that are currently unicorns that don't have clear pathways to revenue, but that doesn't mean they're not creating value. It may just be that they're not creating value for their shareholders. They're clearly creating value for Nvidia, for Intel, for Micron, for SanDisk, and they may also be be creating value for the people who are going to distribute those things, like the Apples of the world.

They're creating value for Google and Microsoft in their cloud businesses. So, to me, I think you've got to ask two separate questions investing in this market. Question one is where is the value creation overall? Is AI writ large a bubble? Do we have the right number in aggregate? But number two is then have we allocated this correctly? Like, is it in the right companies? And I will tell you, I am much more skeptical of number two than I am of number one, if that makes Yeah. Yeah, the capital's going to capex receivers, as it's capex payers and their capex. So, that's the dividing line.

The capex payers, these cash flush companies and and governments, and the capex receivers, they're the semiconductor uh complex. So, they're they're the they're the winners, but that'll shift, too. Like, at you know, it's 18% of the S&P now. Usually, when you start to see headlines like that, it's time to look in other pastures. You know, when technologies share uh of the S&P hit its level in 2021 in Q4, that was at the same time, that was the exact same time to rotate. So, and there are significant bargains elsewhere, and you haven't seen the AI enablement layer really activate or get rewarded yet.

Right? You're going to need You're going to need companies like the accentures and these consulting companies to deploy their their professional services arms to just integrate and re-transform workflows, do the process mapping. That AI can't do that. You have to have highly regulated governance on these AIs, the AIs need policy controls and I just saw recently Microsoft rolled out their AI agentic solution. So they're they're coming after Claude, right? Claude is in the pole position. They leaped open AI.

Uh Microsoft has all the IP from OpenAI and they just rolled out an agentic AI framework that has what enterprises need. They can lock down an agent, they can permission it, they can have a policy around it. They can you know, the AI agent might or might not have a certain data, they can revoke it at the enterprise level. That's actually how enterprises operate. If you look back to the late '90s, first there was Netscape Navigator. We had that moment with the launch of chat GPT a few years ago, then Microsoft showed up with the browser a few years later. The big guys always show up later.

But they don't stop and it doesn't matter if their form factor is late or it's not as effective. They know their customer well and they're integrated well. So they have a you know, that's an example of those opportunities that are still out there where I think they're still attractively priced. If you liked this segment, please like, subscribe, and tune in every Monday at 4:30 p.m. Eastern time. I'm Austin Campbell, the host of Bips and Bips, along with my friends Ram Ahluwalia and Chris Parkins and our slate of exceptional guests. Every week we're going to discuss macro, crypto, and the collision of worlds, covering topics [music] that move markets and shape the financial landscape. Who in the group chat has the absolute worst sports takes? You guys, it's got to be me. I

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