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Not 2000. But there are similarities.

by xyonent
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Artificial Intelligence.jpg

While there were quite a few people active in the markets in 1999-2000, many of today’s participants are not. I remember looking at charts and writing about the market frenzy as the Y2K scare and the boom of the “Internet” dominated media headlines. It was a real dichotomy. On the one hand, it was feared that the turn of the century would “end the computer age” because computers would not be able to handle the date change to the year 2000. But at the same time, the Internet would massively increase productivity and make the world grow faster.

At the time, the S&P 500, and especially the Nasdaq, were soaring higher each day than the day before. The market breadth looked pretty narrow because the big stocks were soaring and index companies and ETFs were forced to buy those stocks to maintain their weightings. This strengthening positive feedback cycle drove the market higher each day.

I remember that time very well.gold Rush” It is the biggest event of the 21st century for investors.

What’s interesting is that, just like back then, we’re seeing investors chasing something relevant. “artificial intelligence.” The Internet for Business “Dot com” Since 1999, when more and more companies started to add their company name to their name, today, more and more companies are adding their company name to their name. “AI” Strategy in Corporate Perspective.

“Executives can’t stop talking about AI. Since the release of ChatGPT, the number of companies mentioning AI during earnings calls has skyrocketed. The number of times AI is mentioned during earnings calls has increased as well.” – Accenture Technology Vision 2024 Report

The difference today is that companies moved forward regardless of actual revenue, profits, or valuation. All that matters is that they are on the leading edge of the Internet revolution. Companies currently competing to be at the top in artificial intelligence are reaping real revenue and income.

But do those differences eliminate the risk of another disappointing outcome?

Force-feeding frenzy

As mentioned above, in 1999, “Dot com” As the bubble inflated, ETF providers and index tracking managers were forced to buy more and more of the largest stocks to keep them in balance with the index. As we discussed previously, there has been a forced supply frenzy in the largest stocks, given the proliferation of ETFs and increasing investor inflows into passive ETFs. In other words:

“The top 10 stocks in the S&P 500 index make up more than a third of the index. In other words, a 1% increase in the top 10 stocks is the same as a 1% increase in the bottom 90% of stocks.

When an investor buys shares in a passive ETF, they are required to buy shares in all of the underlying companies. Given the massive inflows into ETFs over the past year, and the subsequent inflows into the top 10 stocks, the illusion of a stable market is not surprising.

Naturally, forcing money into the most heavily weighted stocks makes the market look stronger than it actually is: As of June 1, only 30% of stocks were beating the overall index.

The lack of range is much more pronounced when comparing market cap weighted indexes with equal weighted indexes.

However, due to the concentration of capital inflows to the companies with the largest market capitalization weighted averages, the market capitalization of those top stocks is “Dot com” bubble.

The forced buying of index-leading companies is reminiscent of 2000, but it’s not going to reverse anytime soon. If this is truly a market bubble, it could continue for much longer than would be logically expected.

It is when reality fails to meet expectations that the market ultimately reverses, just as it did in 2000. Currently, sales growth expectations are trending exponentially upwards.

While it is certainly possible that those expectations will be met, there is also a substantial risk that something will happen.

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Trees don’t grow to the sky

Just as in 2000, the valuations investors paid for companies like Cisco Systems (CSCO), Nvidia (NVDA) during the dot-com boom, plummeted in reality, and the same thing could happen with artificial intelligence in the future. As the WSJ recently noted:

“Since OpenAI opened ChatGPT to the world in late 2022, AI has seen phenomenal growth, with Nvidia being the biggest winner as everyone races to buy the company’s microchips. To see what’s at stake, note that this isn’t a regular speculative frenzy (though there was a mini AI bubble last year). Nvidia’s profits are rising almost as fast as its stock price, so if there is a bubble, it’s a chip demand bubble, not a pure equity bubble. As far as mispricing goes, it’s more like the banks in 2007 when their profits were unsustainably high than the unprofitable dot-coms of the 2000 bubble.”

Here’s a great analysis of four things that can go wrong with AI.

  1. AI is overvalued, so demand is falling (much like we saw with the dot-com companies).
  2. Competition drives down prices.
  3. Suppliers demand a larger percentage of revenue.
  4. What if size doesn’t matter?

Legendary Silicon Valley investor Robert McNamee said:

“Some companies and journalists completely believe this. [the AI hype.] Before investors jump on this, we should ask ourselves, “How do you get paid? How do you get paid to essentially make $500,000 every time you run the training set in a 5% environment?”

As always, the current craze is “artificial intelligence” Stocks are a series of Investment Themes From a long-term market perspective.

“But if we’ve learned nothing from SPACs, cryptocurrencies, meme stocks and the other stuff that drove the market’s last rally (you know, when interest rates were so low that stocks were the only place to put your money), it’s that when these things turn around, they’re always brutal.”Herb Greenberg

And as mentioned before:

“These booms brought great opportunities as innovation provided fantastic investment opportunities to capitalize on advances. Each phase led to fantastic market returns lasting for more than a decade as investors chased new opportunities.”

We are once again experiencing such a speculative phenomenon. “boom” Anything related to artificial intelligence has captured the imagination of investors. What hasn’t changed is that analysts and investors are once again “Trees can reach the sky.”

“Trees don’t grow to the sky” is a German proverb that suggests there are natural limits to growth and improvement.
This proverb is relevant in investing and banking and is used to explain the dangers of mature companies with high growth rates. Sometimes, companies with exponential growth rates get high valuations based on the unrealistic expectation that as the company gets bigger, the growth rate will continue at the same pace. For example, if a company has $10 billion in revenue and a 200% growth rate, it’s easy to think that in a few years, it will reach hundreds of billions of dollars in revenue.

Generally, the larger a company is, the harder it is to achieve a high growth rate. For example, a company with a 1% market share might be able to achieve 2% easily. But if a company has an 80% market share, doubling sales would require it to expand its market or enter new markets where it is not as strong.
As they grow due to diseconomies of scale, they become more efficient and innovative.

Modeling how quickly growth rates slow as a company gets larger is one of the most difficult elements of stock valuation.”simply

After the 1999 internet boom swept through both retail and professional businesses, Jim Cramer released his famous list. “winner” About the decade of March 2000.

Jim Cramer's dot-com winners of the next decade

This isn’t surprising, as there are endless possibilities for how the Internet will change our lives, our workplaces, and our future. While the Internet certainly changed our world, the reality of valuations and revenue growth eventually collided with that illusion.

No, this is not the year 2000, but there are similarities. Will it be different this time, or will the trees once again not reach the sky? Unfortunately, we won’t know for sure until we look back through the lens of history.

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2024/06/11

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