According to investment manager Bill Smead, the AI boom is a “bubble” propelled by the “momentum” of surging stocks like Nvidia.
“Dogs chase cars, and people chase stocks,” the founder and chief investor of Smead Capital Management told in an interview.
Since the beginning of 2023, Nvidia’s stock has increased twelvefold, propelling the AI chipmaker’s market valuation to an all-time high of $4.4 trillion.
Over the same time frame, Palantir’s stock has increased 28-fold, putting the company that creates AI-powered data analysis tools at almost $420 billion.
Smead stated, “We’re in the crazy stage,” citing CoreWeave as an example. CoreWeave made $1.2 billion in revenue the previous quarter, yet its market value is $60 billion. At the end of June, the AI cloud computing business revealed a $30 billion sales backlog, supported by an extended contract with OpenAI, a major client.
Smead said, “It is late ’99,” alluding to the time frame just preceding the height of the dot-com boom in March 2000.
According to Smead, this is fundamentally the same as all previous big manias. “We’re bumping up against history real hard now.”
The issue, according to Smead, is not whether AI businesses see the potential advantages of the technology, but rather that any success they may have had has already resulted in extensive overcapitalization.
He stated that “when this thing breaks,” consumers will only be prepared to buy AI stocks for a fraction of their current price.
Oracle shares soared 40% in a single day earlier this month when the company forecasted fast revenue growth in its cloud infrastructure business, which serves AI companies like OpenAI.
However, Smead stated that if it can climb so much in a day, it can also sink 40% in a day.
He said that there have been drops of similar magnitude when the dot-com bubble bust at the start of the new millennium. “That is going to be spooky,” he warned.
With over 40 years of expertise, the value investor expressed concern about the “incredibly unusual,” intimate, and incestuous ties between big AI companies. Recently, Nvidia committed to contribute up to $100 billion to OpenAI in order to assist the ChatGPT manufacturer in funding the expansion of AI data centers that use Nvidia processors.
According to Smead, he is “extremely concerned” that so many individuals have a large portion of their savings invested in Big Tech stocks since there may be a significant financial impact if they fail.
According to Smead, he is witnessing the construction of mansions for $10–$20 million in his community in Arizona’s Paradise Valley. High-end homebuilding will cease if the market collapses and tech stocks plummet.
He did, however, warn that investors should not completely sell their equities and wait for a market meltdown since “you can’t hold your breath until then.”
According to Smead, his fund has generally shunned tech companies in favor of real estate investment trusts, or REITs, energy, homebuilding, healthcare, and retail.
“We own a lot of meritorious companies in a lot of out-of-favor sectors,” he stated.
