r/valueinvesting
AI-related Stock valuations may not last
Argues AI stock valuations are unsustainable as widespread adoption drives competition, compresses margins, and risks ROI on data center capex.
- Widespread AI adoption will increase competition across industries, driving down prices and profit margins.
- Companies may struggle to generate sufficient ROI from massive data center investments due to margin compression.
- Potential crash scenario involves failed AI divisions selling off data centers, creating a supply glut of previously scarce hardware.
The valuations are based on the prediction that AI will keep improving and become extremely useful with companies using millions of AI agents to generate value.
If this generated value does happen, it will lead to increased competition with more and more companies being able to compete in a wider variety of products. This will push down prices and profit margins.
This effect has been anticipated in the software industry but it also applies to any industry where AI can be used to generate value.
The increased competition will cause companies to struggle to generate an ROI from the data center investments that they are building.
Crash scenario: Some companies' AI divisions fail and they sell off their data centers - causing an abundance of what had previously been scarce.
Am I being too superficial or is this just... a post full of nothing?
duh, supply > demand -> low ROI.
duh, demand > supply -> high ROI.
People vastly underestimate what WILL always happen anytime there is a huge technological revolution: There will always be a bubble at some point but what point of the bubble we are at is almost always misjudged, and frankly a lot of people seem to think there will be this magical moment where everyone realizes the ROI isn't there (though of course there is no magical point in time to judge this, as it could be argued it will take more time).
But you know what I do know? The most powerful people on earth, aka the tech bros + their politician friends are all going into this with no half measures, and they believe in it, and they can fund this whole thing a whole lot longer than some of you seem to realize. Like, really, the Google CEO is just gonna turn around go "Oh shit, the stock price is down, let me undo the last years of work that I still believe in and can fund"? Yeah good luck with that, and as we all know, people love bailouts, and Trump being as greedy as he is, knows they would be forever indebted to him... do the math, I give that 90/10 odds.
But oh, don't you know, the music is about to stop... any minute now! The music will stop when it is allowed to stop, again, something many seem to not comprehend.
I know better than tech oligarchs. I am a Redditor.
I kind of agree with you, but if they could just keep funding it, they would keep them private. It would have been much easier that way. The simple fact SpaceX, OpenAI and Anthropic are all going public means that “tech bros” are already all-in and have no more extra money to add. Especially true for SpaceX because Elon absolutely hated public markets.
I guess I should've been more clear on what I meant: I was talking about the real, proven giants: MSFT, META, GOOG, AMZN, in particular, who are the ones paying for the CapEX.
But yes, in terms of anthropic and openai it does look a a bit concerning, I also think a lot of it is about when it is ideal to IPO, not about "We need cash in 3 months or we're toast". They've recognized that 1. They will need to IPO at some point, 2. They don't want to be the last one out of the gate and the conditions might not be as good in the future.
Right. I agree. When you mentioned SpaceX in my mind I was like (TAM TAM TAM) and then your punchline hit. Lol.
As per the “giants”, I dont know, they can’t go too much overboard there, because they may get punished by the markets if they go “full retard”. And I deliberately said “may” here because you never know in this market. But anyway, I think that’s why META started doing that SPV nonsense, to keep investing large sums without it being too obvious in their balance sheet. The time will tell. I’m still bullish overall, but I am starting to get concerned by the amount of bullshit I keep reading on a daily basis of people valuing companies based on capturing 100% of TAM and dominating industries that don’t even exist today.
I don't think there would be a bailout as only companies like OpenAI and Anrthropic would go broke. Others will take a hit but they will still have their normal revenue sources.
The investments are based on the assumption that companies and individuals will pay high prices for AI computation power.
However there will be a large array of companies competing with each other which could push down prices with users being able to easily switch between them.
Low prices means low ROI for the companies that expected people to pay.
Ehmmm….. No? The whole reason why there would be more competition is because ai would make it easier… Therefore the demand for ai will be extreme, the roi cant compress because no one without ai could outperform those with ai.
US is fked.
I see it as two different things:
AI - > Increases business effienciency -> Lowers costs -> Positively affects ROI
Competitors also using AI -> Increase pressure on pricing/margins -> Negatively affects income
Which of these 2 moves would you make as a business:
- You stop investing in AI for your business because competitors using AI drove down margins and risk losing market share.
- You invest more into superior AI solutions to keep an edge over the competition and survive.
This seems silly.
Does AI provide meaningful production increases - Yes.
Have virtually every major CEO pivoted to saying AI utilization is important - Yes
Will the hyperscalers continue to invest in AI- Yes
Why are we worried about it failing? It just ran up too much, people got too excited. It is pulling back a little bit. This is healthy. It's still just as transformational as it was yesterday.
Ask yourself, have advancements in compute ever "not been used" or whatever you are trying to say. Its absurd
Ask again in a few years.
Think dell gonna go crazy next weeks