Why I changed my mind about the AI bubble.
Is there a bubble in AI stocks?
A few people have asked me this, and look, I’m much more comfortable talking property than stocks, but I do find the AI story fascinating.
And until recently, I think I would have said yes. Sure seems like there’s a lot of hype around AI, and the markets seem very tilted to the Magnificent 7.
But every innovation of substance looked bubbly at the beginning. Amazon looked like a bubble in the early 2000s, but then reality caught up with market pricing, and the share price eventually made sense.
Remember, markets have to be forward looking.
And so the question is really whether AI is going to deliver what the market pricing currently suggests it is.
And just quietly, it might.
And maybe we’re already seeing it.
Professor Scott Galloway made a really interesting point last week. He noted that Big Tech has been laying off staff for years, but their profits are booming. That’s not the normal play of events.
All told, tech companies fired 165,000 people in 2022 and 260,000 in 2023, and they’re on pace for 270,000 in 2024. The media narrative is that these firms are shedding the excess weight they put on during the pandemic.
… Overdone pandemic hiring was a reasonable explanation for the tech layoffs in late 2022. But 18 months later, there’s been sufficient time to reduce headcount. There’s no incentive for a company to slow-roll this process — a drip feed of layoffs drains company morale. There is something else going on.
Business results also don’t explain the deeper cuts. These companies are killing it. Meta’s revenue was up 16% in 2023; Alphabet’s, 9%. Microsoft’s most recent quarter registered 72% greater revenue than the like quarter in 2020, which (until then) was its highest-grossing quarter to date.
… The layoffs are no longer a signal of economic conditions, but innovation.
What’s really going on? I believe AI is playing a larger role in layoffs than CEOs are willing to admit.
Yep. CEOs are going to be very coy about the extent of AI they’re deploying, especially if they’re using it to decrease headcount. They’ve seen that the public is already very nervous about this – think the Hollywood Writers Strike – and they don’t want to freak out their existing employees.
Also, when you’re magically just making the bottom line go up, you look like a genius. If people knew that it was just because you employed a bunch of robots, suddenly that $500m bonus doesn’t look so justifiable.
So if all this is true – if it’s true that some of the most profitable companies in the world just recorded record profits through the deployment of AI – in just a few years – then, well, it kinda proves the AI thesis.
AI is a gamechanger and it’s coming quicker than we think.
All of which means the bubble has substance.
JG.