Questioned and Questionable
“I would rather admit that I do not know than pretend I do.” Any idea the person that spoke these words? Refreshing to hear someone not pretend to know all of the answers or filibuster and not answer at all, isn’t it? It rings true for me in describing the current stock market environment. AI is everything. Period. Sam Altman, he of Chat GPT fame and fortune, with little to no semiconductor experience shocked the markets Friday by claiming he seeks $7 trillion in funding for AI semiconductors and related. The number is so absurd it isn’t worth debating. He might as well have said he is building a real life “The Matrix” and Keanu Reeves is going to be the CEO. Is this the Walt Piecyk December 30th, 1999 Qualcomm $1000 price target moment and market top? Again, I would rather admit that I do not know than pretend I do. The author of these words? Rob’s Educated Guesses on Friday, February 9th, 2024.
We can gather facts such as Microsoft Co-Pilot being unsuccessful so far in its 1.0 iteration. Or, industry leaders such as PANW discussing how generative AI isn’t ready for prime time in finance:
But, impugning facts aren’t really helpful from an investing or trading standpoint right now, are they? In the blow off phase, as we described a couple of weeks ago, you either decide to participate and suspend belief or you sit on the sidelines and observe. I remember the Year 2000 rally vividly even today. Growth rates were astounding. Cisco was growing its networking revenue 50% per annum via startups and enterprise excitement around connecting to the Internet. Sun Microsystems suddenly became the powerhouse backbone of the Internet with their workstations that could process at bandwidths and speeds multiples of existing computers. Fiber network spending across the country hit a fever pitch and JDSU and Nortel were the names all investors were asking if you owned that stock. It was great to be alive and investing!
Replace Sun Micro and Cisco with Nvidia and AMD. Replace JDSU with Marvel and Broadcom (AVGO). Do not get me wrong, the build out and capital spend was real and the growth rates were spectacular for about two years. The valuations become unrecognizable to traditional investors who used P/E versus growth rates. The hedge fund I worked at was long many of the true leaders in this mania and short what seemed like obvious silliness in companies like CMGI, an incubator which had an NAV about 1/10 the stock price. Look at the chart below and guess how that short worked out for us?
History does and will repeat itself. What killed the Y2K mania was and is debatable, but all manias do end, badly. Pets.com never made sense as a business. Pets.com buying a ton of Cisco and Sun Microsystems equipment wasn’t sustainable and eventually resulted in a 2nd hand market for used equipment. It did not end on a single piece of bad news. I remember having a firm wide meeting laying out the data points that suggested business as in fact, peaking slowing and showing signs of an inventory build that would result in multiple air pockets. The Y2K fix the digits mania had a firm deadline, January 1, 2000. Still, it wasn’t until Friday March 10th, 2000 that the “bubble” began to truly burst. I can assure you that on March 9th, 2000 most every investor was either knee deep long everything and “believing”, short and tapping out or sidelined and confused.