Firstly, I don’t know if Artificial Intelligence is a giant bubble waiting to 💥.

The world of Artificial Intelligence is evolving rapidly, with significant growth seen in companies like Nvidia and other tech giants in the AI industry. This has led to concerns about the possibility of a market bubble forming.

The AI industry’s expansion is reminiscent of the dot-com era, resulting in inflated valuations. For instance, Nvidia’s market cap currently stands at $3.188 trillion.

Nvidia is undoubtedly a strong company with increasing revenue, robust profit margins, and a focus on a growing sector. However, investors should consider the broader market dynamics before making investment decisions. To put things into perspective, the total market cap of the Australian Stock Exchange (ASX), the New Zealand Stock Exchange (NZX), and the Singapore Stock Exchange (SGX) combined is approximately $3.2 trillion.

Given the opportunity, if you had $3.2 trillion cash (I don’t) to invest you could acquire every company within these three exchanges compared to investing solely in Nvidia. I know what I’d rather buy and it isn’t one company…

At least the current businesses earn…

One major difference from the dot-com era is that many of the current “AI Heroes” are making huge amounts of money, which is a significant change. Expensive valuations with with little to no underlying business = S***, while high valuations along with rapidly growing revenue and thriving profits = Complicated.

💾 The semiconductor sector, which was previously strained due to supply shortages a decade ago, is now experiencing increased demand, driven by the surge in AI applications. This transition has led to companies focusing on competing in this space, evident from the prominence of keywords related to AI in their annual reports and earnings calls. Just a few years ago, Nvidia did not hold a leading position in this sector, now it’s the GOAT 🐐.

Semiconductors play a crucial role in the widespread adoption of AI across various industries. While AI’s impact on society is yet to be fully understood, it is clear that AI and semiconductors are driving a significant transformation in the market landscape. But could it all burst?

📈 A multi-bagger from a large base.

I’m not sure if a bubble is forming, but I would advise caution if you were considering investing in the Artificial Intelligence industry, especially in individual companies.

Valuations like Nvidia’s seem excessive, given its tremendous growth for such a large company. It’s often suggested that investing in micro-cap and small-cap companies is ideal for finding multi-baggers, as a company can grow rapidly from a smaller base. Nvidia has defied this idea by becoming a multi-bagger from a multi-billion dollar market cap base.

I’m willing to pass up on any profits to see how this Artificial Intelligence boom all plays out. I don’t want to chase these numbers and be left holding the bag.

If you want exposure to AI, I believe several long-term opportunities align with the theme but are not completely dependent on it. Most companies will naturally implement AI for a variety of reasons. It’s already happening… it’s already happened.

When mainstream media hammer a topic like AI, I always get a little sceptical. It’s when everyone starts to join the ride and rush in, crazy things can happen.

🇮🇳 A little story about India…

I have some reservations about the Artificial Intelligence industry from a public markets perspective, not from the use or adoption of it. I think AI can be very valuable in the long term.

From 2017 to 2020, I lived in India where I was involved in various business activities in addition to eating a lot of curry and dosa. I didn’t leave the country for 3.5 years and during that time, I had the opportunity to interact with some of the brightest young minds who were working on cutting-edge technology and applications. If you want to witness technological advancements, visit the “Silicon Valley” of Asia in Bangalore.

I spent a good amount of time in Chennai and met with teams of tech developers at a few colleges. These young minds were working on developing Artificial Intelligence applications for a range of purposes, from facial recognition software to machine learning-based trading software.

I was fortunate enough to observe some amazing use cases of AI in the real world, and I was immediately drawn to the concept. I even looked for some private startups to invest in.

It was hard to commercialise AI then it will be hard now.

It’s interesting for me to see that many years later, the same ideas and keywords related to AI like “AI adoption” and “AI implementation” are now being discussed by publicly listed companies and the media. Companies aren’t late to the party, but I find it intriguing as it takes years, even decades, for technological advancements to become mainstream.

It’s just that the talk of machine learning, AI-driven algorithms, and all the sensational language being used, I heard it all nearly 8 years ago.

The purpose of sharing this short story about my time in India is to highlight that these ideas have been in development for a long time. I get concerned when something is hyped in the media as it is these days, and I encourage all investors to pause and think about it.

📰 The media are all over AI.

I believe caution is warranted, not because I’m sceptical of AI, which I think will be a huge part of the growth and development of business and society. However, when a new technology, craze or theme hasn’t fully played out and that intersects with the stock market…Wild things can happen.

I can’t believe how fast Artificial Intelligence came into prominence in public markets and in the media. If it is the headline of major articles and the most referred to phrase in Annual Reports, then the smart money has been made. Yes of course investors have made bucket loads off the rapid rise of Nvidia…but don’t let Mr Market get the better of you.  

Many investors are suffering from FOMO and trying to catch the rally. I advise not throwing out common sense chasing the AI craze especially companies with no revenue, in development stages or have excessive valuations.

Do you believe in AI or just investing with the herd?

Take your time to understand the Artificial Intelligence industry, all the moving parts, and look downstream of the benefactors of AI and the entire value chain to the sector.

I’m amazed how many investors can not explain what they think Artificial Intelligence is and how it will be used. This goes back to the foundation of investing, Invest in only what you know.

So what if a company develops some great AI tech? It needs to be widely adopted to make it successful. Don’t pay any multiple just to get in. You make your money when you buy. Sure, you can catch the upside on companies like Nvidia, but that is hard to time.

I’m not boycotting or suggesting Nvidia and other AI public companies are bubbles. Some are strong businesses with huge growth in revenue and profitability. It’s still important to pause and not get caught up in the roller coaster 🎢.

I will over time gain exposure to AI; the capacity and sector are yet to be determined. I’ll just take my time and look for the best long-term opportunities that can play to the sector theme in the future.

So, I can’t definitively say Artificial Intelligence is a bubble or not; it’s certainly a boom, and what follows booms is usually a bust…but your guess is as good as mine.

It simply means I’m watching the space, not getting caught up in the euphoria and trying to chase the next big, whatever it is.

If a company says it is pivoting into AI…

This is where I believe the current boom in AI becomes a little complicated to demystify. A lot of booms were built on companies doing practically nothing. So, a word of caution is to look at companies that say they are “pivoting” into AI and consider how far this is from their core business activity.

A business does not transition into a new segment with little expertise and without years of prior discussions backing it up. If the “transition” seems left field, it probably is.

If we take lessons from previous booms, we should look at the trends and patterns in companies using hot keywords like “Internet” to drive shareholder interest and raise money. When companies mention AI these days, we should evaluate what they are actually doing. Is it in line with what they have been doing, or is it a natural transition or a clear distraction?

This is one of the first stages to determine if a company has a future in the sector. Does the company’s management have any expertise in these fields? There have been a lot of public companies trying to take advantage of the AI boom by talking about it, but the chances of a company successfully pivoting into AI are pretty slim.

While I may not lean in any particular direction, I believe it’s important to consider the long-term impact rather than jumping on the bandwagon. The dot-com era initially caused a crash, but the longevity of the idea now dominates the world.

Similarly, with Artificial Intelligence, it may still be in the early stages of adoption and understanding its broader use case for companies and society. This might lead to a few dominant players emerging over the next decade, as it’s possible that the idea is great but it’s just too early.