AI Hype and Elon vs. Zuck??
Happy Sunday,
A video just came out this morning with Lex Friedman training with Mark Zuckerberg in Jiu Jitsu. Fascinating to see them go at it, it’s not an environment I would picture either of them in. Today we’ll be discussing the AI Hype that’s been going on in the stock markets, as well as the “cage match” that Elon and Mark Zuckerberg are both “serious” about doing. Whether or not it will happen — who knows. I feel like Elon is trolling hard.
I don’t have much to report on the personal side. I’ve been playing a lot of Diablo IV, thinking about video ideas, and trying to eat healthier. So far the only thing I’m successful at is Diablo IV :). Fun fact, Diablo II was my favorite game growing up - and I’ve played every single franchise of it, except for the first - I didn’t really dabble in that. So far, D2 > D4 > D3 in my opinon.
Hope you have a great week ahead!
— Humphrey, Tim & Rickie
Market Report
And just like that, we’re halfway through 2023. Predicting stock market trends has proven impossible so far this year, from the $5 trillion surge in the tech sector powered by AI and ChatGPT to the collapse of several regional banks. Nvidia emerged as the leader of the AI-driven frenzy while Tesla regained its status as a favorite among investors.
The excitement around AI prompted investors to funnel unprecedented amounts of capital into the tech sector, contributing nearly $5 trillion to the market cap of companies on the Nasdaq 100 Index. Nvidia, whose semiconductor chips are integral to AI applications, was at the forefront of these gains, with its value nearly tripling to exceed $1 trillion. While some believe AI will enhance efficiency and expand profit margins across multiple sectors, others believe that while AI will ‘change the world’, the current valuations of AI stocks are absurd.
Aswath Damadoran, a professor at NYU, recently wrote an incredible piece on substack titled “AI's Winners, Losers and Wannabes: Valuing the AI Boost at NVIDIA”. In the article, he discussed the bull and bear case for Nvidia and AI as a whole and built a discounted cash flow (DCF) model in order to project Nvidia’s share price. His assumptions for Nvidia’s future are here, but in summary, his calculations were optimistic: he projected a 60% market share by 2033, a tenfold increase in revenue by the same year, a terminal growth rate of 3.6%, and a consistent 35-40% ROIC for 10 years, among other things.
Despite all these optimistic predictions, the calculated value per share was $240, while the current share price sits at $422, near the 95th percentile of the value distribution according to a Monte Carlo simulation.
So is Aswath right? Only time will tell.
It’s important to remember that at the end of the day, the semiconductor business is a cyclical one. This means that its performance follows the fluctuations of the economy, with periods of rapid growth followed by downturns. Here’s why:
Product life cycles: New technologies (ChatGPT/Generative AI) and products (VR?) often drive demand for semiconductors. As these products reach maturity and market saturation, demand for semiconductors may decrease until the next innovative product comes along.
Capital investment cycles: Semiconductor manufacturing requires significant capital investment in facilities and equipment. Companies often increase investment during growth periods, leading to increased production capacity. However, if this increased capacity comes online during a period of decreased demand, it can lead to oversupply and falling prices.
Economic conditions: Like many industries, the semiconductor industry is influenced by broader economic conditions. In periods of economic growth, demand for electronics and the semiconductors that power them tends to increase. During economic downturns, this demand can decrease.
Inventory management: Semiconductor customers often adjust their inventory levels based on anticipated demand. If customers anticipate a downturn, they might reduce orders to lower their inventory, leading to decreased demand for semiconductors. Conversely, if customers anticipate increased demand, they might increase orders, leading to a temporary spike in demand.
Wherever you look online, you're likely to encounter relentless pitches for AI. The constant tweet threads, the YouTube videos (HOW TO MAKE MONEY WITH AI), etc. There’s no doubt that AI will change the way we work and study (ask any college student about how incredible GPT is). However, believing in the transformative power of AI doesn't necessarily mean that investing in AI-related companies will generate returns above the overall market return. So many things have to go right. You might be able to pick the 'right' company, but the price at which you enter the stock market is just as crucial.
As the news continues to cover AI nonstop, It’s likely that the hype will keep going and the bubble will keep expanding. Be careful out there!
Forecast Ahead
Big (or little) Number: 0.1%
After eight consecutive quarters of decline, US residential investment seems to be rebounding, potentially removing a significant hurdle to economic growth. The Federal Reserve Bank of Atlanta is now projecting that residential investment contributed 0.1% to the growth in GDP in the second quarter, marking the first positive contribution since early 2021. This comes as new construction activity is at its highest level in over a year, with falling materials costs, easing logistic constraints, and limited availability of resale homes pushing more buyers toward new construction.
However, future growth in this sector is largely dependent on monetary policy. The Fed's interest rate hikes, with an increase of five percentage points over a year, could impact new home construction. In addition, the number of homes under construction could decline as backlogs ease. But, even with these potential risks, home construction is finally set to contribute positively to the economy after subtracting from growth for the longest stretch since 2005-2009.
Overcome the Sunday Scaries
Will the Elon vs. Zuck fight actually happen?? Let us know who you think would win!
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