r/stocks
Does most of the analysis on this sub miss the key point? What can be done to answer the key question?
Author questions if enterprise AI adoption can sustain current high valuations and massive capex of tech and semiconductor stocks.
- Picks and shovels companies are currently generating revenue from the AI infrastructure build-out.
- Enterprise AI adoption might not materialize to justify current valuations.
- Massive free cash flow spent on AI data centers could be wasted if demand falls short.
- Stocks are priced for a decade of high FCF growth, which is unsustainable without strong AI adoption.
I see so many posts discussing if they should buy MSFT, NVDA, MU , Intel, TSM, AMD etc, but almost none discussing the thesis behind these companies: will there be sustained AI adoption at the enterprise level.
In my admittedly novice opinion, investors in tech should be spending their time figuring out that capabilities of AI models, their use cases, how much value they are delivering to companies etc. It doesn't matter what kind of margins or cash flow they have right now, or if MSFT "looks cheap". If MSFT is spending all of its free cash flow on AI data centers and demand doesn't materialize, their stock price is fucked. Even the picks and shovels companies, sure they get paid right now either way, but even the lower PE names like TSM/NVDA are being priced for \~18-20% fcf growth for a decade. Sure you can bet that the cap ex cycle can continue for a while without strong AI adoption, but not indefinitely.
What do you guys think are the best sources of information for this kind of stuff? I've been reading semi analysis, academic studies, mckinsey reports, looking at gov procurement and darpa.
There is more demand right now than cloud providers or frontier model companies can keep up with. The bottleneck is compute.
What is the rationale for your fear that the demand will somehow dry up?
"Does most of the analysis on this sub miss the key point?"
The key point is that much more was spent on capex this year than last year and much more will be spent next year. The narrative (and much of the last 5-6 years has been narrative driven in some form or another) of AI is considerable and that's what stocks people want and talk about.
People can talk about things like "If MSFT is spending all of its free cash flow on AI data centers and demand doesn't materialize, their stock price is fucked" and it might not be until 2028 until that is realized for all we know. People on here in 2023 were going on about how people should buy PYPL instead of NVDA after the latter had started to run up because "PYPL was cheap and AI isn't going to happen."
"capabilities of AI models, their use cases, how much value they are delivering to companies etc."
What that looks like is considerably different than it was a year ago and will quite possibly look quite different 6 months from now. We're at the point where the government is suspending access to Anthropic's Fable and Mythos - https://www.anthropic.com/news/fable-mythos-access
"Somewhere around 26/27 or so, the mood in Washington will become somber. People will start to viscerally feel what is happening; they will be scared. From the halls of the Pentagon to the backroom Congressional briefings will ring the obvious question, the question on everybody’s minds: do we need an AGI Manhattan Project? Slowly at first, then all at once, it will become clear: this is happening, things are going to get wild, this is the most important challenge for the national security of the United States since the invention of the atomic bomb. In one form or another, the national security state will get very heavily involved. The Project will be the necessary, indeed the only plausible, response." - "SITUATIONAL AWARENESS: The Decade Ahead
Leopold Aschenbrenner, June 2024" (https://situational-awareness.ai/)
I agree cap ex is going up this year, and very likely next year, but the market does a decent job at being forward looking. I worry that everything might look ok on the surface, but Wall Street knows that AI adoption is slowing and cap ex will get cut and I'll be left holding the bag.
I agree about Mythos, I was incredibly impressed by it. I mentioned in another thread I asked it a question about chess and rather than hallucinate a bad answer, it went out on its own and downloaded a chess solver onto its operating system and gave me a good answer. That kind of self awareness and tool use was cool to see. I also have used Opus to create useful apps despite knowing nothing about coding.
And yea, if you check various government research and procurement sources, they are incredibly bullish on AI. There are all sorts of physical AI and miniature/mobile data center projects they are interested in. I think AI for autonomous drones alone is going to be huge since they can't be easily jammed.
The market is somewhat irrational so you can’t rely on fundamentals. But one metric that has worked for me in the past is market cap. As an example, last year when Nvidia surpassed $5T, AMD was under $500B. That to me signalled that AMD was very undervalued. I think that’s still the case.
Back in the day, I saw a Tesla at the local mall, and looked up the company and it had a market cap of $3B vs Toyota at the time at $30B and thought to myself… this new car company can probably rival the mainstream manufacturers one day. Now it’s over $1T.
My point though is that if there isn't AI adoption at the enterprise level, hyperscalers will eventually cut cap ex and NVDA, AMD, and whoever else you name will plummet.
There’s already AI adoption in the Enterprise. It’s being used widely in many companies already. The thing is, even if AI turns out to be a fad... What we learned from Covid even… is that chips for everything are supply constrained. There’s chips in everything and demand is insatiable.
Just set a trailing stop sell. All upside no downside.
A truly massive move will blow right through a stop loss and leave you with bags. I find memory too volatile for a 20-30% stop loss anyway. I don’t see this train stopping for at least 1-2 more years. The moment I think things might start to slow, I’ll sell. If wall street beats me to it, I’ll still probably be alright. And that’s assuming memory remains cyclical and doesn’t just keep raking in money with massive contracts.
What are your sell signals?
I'm looking at cap ex signals, memory spot/contract price, and whatever I can get my hands on to evaluate AI adoption rates and model capability. I tried looking at how much memory production is coming online the next few years, and I got a general idea, but it's kind of tough to figure it out without institutional level resources.
These are lagging indicators of demand for AI models and use cases. The leading indicators will be based on individual companies seeing value from AI and that kind of data is a lot more fragmented and harder to find.
You can safely assume that there is additional memory capacity coming online from smaller producers many of which are Chinese. Most of it is simpler DDR5 ICs, with HBM being more difficult to produce, but all are being pursued by new competition.
Also safe to assume that AI needs a ton of RAM. When new AI accelerators are produced they need new RAM, so demand will stay relatively high with new accelerators needing new RAM ever few years. Question is price.
AI is crazy good already. It's world changing and only getting better. We are way past the point of whether AI can be monetized. Bottleneck right now is integrating AI into business workflows.
Highly elevated RAM prices are temporary as increasing capacity is brought online, but it's a question of how long the high RAM prices are maintained. I think memory prices will come down but probably over the course of years.
Just my 2c
Decide how much you’re willing to lose before you bail and set a stop accordingly. Most investors will dump a stock when it slashes the 20 (which is often seen as a major support barrier). You can’t rely always buy it back if it turns around. There’s no way I would own a memory stock without a stop. When it drops it’s going to be fast and furious abs if you don’t act quickly you will become a bag holder. Is that going to happen next month or next year? No one knows but it will happen. And a stop sell gives you peace of mind.
In the current environment, the rules are made up and the numbers don't matter. You'll drive yourself mad trying to match fundamentals to valuations during a hype cycle. Reading all that shit is a waste of time.
Best advice is: don't fall in love with a stock, and don't get greedy. Trade the price action, because that's what matters most right now.
Markets are efficient, so any public knowledge is already baked into the stock price. I but into AI stocks because I think AI is for real and will cause the greatest productivity boost in the history of mankind and will change the world for the better. But the consensus is skepticism and fear, which is the best time to invest.
What are you basing that conclusion on? I happen to agree with you, the capability of these models seems to scale rapidly and consistently. I think AI will be adopted in healthcare (eg radiology), drug discovery, coding, material sciences, manufacturing, shipping, law, math, chemistry, document summary, fraud detection, customer service etc. The issue is the magnitude is going to have to be huge, with a trillion in cap ex spend you need well over a trillion in revenue to justify it and then enterprises need well over that number to justify their adoption of it.
My issues are
- Is the hallucination issue solvable for LLM's? If it can't the TAM is massively limited.There are a lot of areas where mistakes are acceptable, like if you're trying to solve a math problem you can throw a lot of shit at the wall until something sticks, but most areas it's not
- Do scaling laws hold? We keep hitting walls and then finding novel ways to make more progress, can this continue
- Can they be integrated into the physical world cost efficiently?
- Are LLM's a dead end for a very strict definition of AGI/loose definition of ASI?