Source: https://www.linkedin.com/feed/update/urn%3Ali%3Ashare%3A7064416580503302144
MarketWatch: “We are at the peak of the AI hype cycle”: #AI #Revolution: #DejaVu All Over Again: “Without #AI-#hype, S&P500 would be down 2% this year. Not +8%.”: https://lnkd.in/gsVrWQxM : https://lnkd.in/gAKtTuVV : We are currently in a #speculative #phase regarding “AI” while experiencing another #speculative “#boom” as “#Generative #AI” grips investors’ imaginations. Charts for 1999 “Dot.com/Internet Revolution” in the Nasdaq composite versus 2023 “#GenerativeAI” #revolution are uncannily similar. While allure of “AI” certainly has #investors salivating at potential #return profile, the #valuation problem remains. Low valuations precede best #investment #return periods because #low #valuations allowed for multiple expansions as investors could “pay up” for #expected #earnings #growth. For example, in 1994, investors could buy Microsoft (MSFT) shares at a Price-to-Sales ratio of roughly three. However, therein lies the problem with valuations. At 11x price-to-sales, there is little margin for error. A good reminder of the importance of valuations was the comment made by Sun Microsystems CEO Scott McNeely at peak of Dot.com bubble in 1999:
“At 10 times #revenues, to give you a 10-year #payback, I have to pay you 100% of revenues for 10 straight years in #dividends. That assumes I can get that by my #shareholders. It assumes I have zero cost of goods sold, which is very hard for a #computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are?”
Yes, many of these companies will benefit from adopting “AI.” However, it is hard to justify, even under optimistic assumptions, that revenue growth will support multiples paid today, even as suggested by #ChatGPT:
“Paying more than five times the #price to #sales for an #investment may pose several potential problems for investors, including #overvaluation #risk, #unstable #earnings, #market #saturation, #competitive #pressure, and industry-specific factors. As such, #investors must conduct thorough #due #diligence and consider various #financial and non-financial factors before making any #investment #decisions.”
As #WarrenBuffett once quipped:
“#Price is what you pay. #Value is what you get.”
Price measures current “#psychology” of the “#herd” as the most precise representation of #behavioral #dynamics of “the #market.”
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