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I'm an old value guy and thought I'd seen it "all" but I was absolutely shocked last week when largest comapny in the history of the planet forecast 70% organic rev growth yoy. That is truly extraordinary.
My natural reaction was to dismiss such forecasts as improbable and a topping signal - this can't go on, its not natural. Right?
I suspended those natural contrarian leanings and spent last weekend (groan) listening to and reading self described "AI-Pilled" nerds fantasize and literally giggle about how big/crazy things could get in the world of AI.
What I took away from dipping my toe into the shallow end of the AI-pilled space was that the incentives are just too strong for the capex $$ stop flowing or even slow. The belief in future demand is too strong, the prize(s) for the winners are too big, the possibilities of the tech are too endless and excitement is too irresistible. The worlds largest financiers are on board, the worlds largest pools of capital are on board, the federal gov is on board, the worlds largest companies are on board (heck BRk is on board)...many are terrified about being left behind and becoming the next Xerox or Kodak.
To put the spending and computing power into context. Anthropic/claude currently has about 1.5 gigawatts of compute right now (and its product is pretty impressive already). They are planning on having 10x (15 giggawatts) in the next 3 +/- years. What can they do with that amount of resources if they have gotten this far with 1/10th of that? You can easily see how bulls get carried away with the future possibilities.
So what's an old school value investor with a 3 year + horizon to do?
* If the bulls are right, the AI complex hoovers up resources and trillions in cash for the next few years (at a minimum) which has to create higher and higher GDP (concentrated in AI names), additional inflation, higher rates, higher opportunity cost leading to lower valuations for non AI. Who wants to own a main-street GARP 6% grower at 15 times ebitda in that scenario let alone the troves on smid caps treading water with low margins, capex requirements, debt, so-so managements, a strapped consumers and so on. I do believe the money will be raised and spent as fast as humanly possible.
* If the reasons they are spending the trillions comes to pass then we are probably in for a rewriting of the economic rules and who knows what equities will do then.
* If the AI bulls are wrong (supply is ultimately higher then demand, govs says no more building, much slower capex spend due to constraints or whatever) then the the whole complex comes crashing down in spectacular fashion and the idea that my small and mid cap value names hold up or even advance as anything AI related gets creamed, the trillions in debt gets sold off, GDP contracts materially, investors pull capital, lawsuits pile up and the news cycles becomes dark(er) is probably wishful thinking, at least until the fed panics and rates go to zero again.
* When the dot com bubble deflated the overall economy was still pretty good and while some value stuff did do very well my experience was a bumpy ride and very name specific (energy did great as did some staples and other random names with specific circumstances) Lots of non tech stuff just did nothing but frustratingly gyrate in place for years.
With that set of lenses its looks pretty much like a rock and a hard place for investors like me. I'm not especially interested in owning mega caps after spending my life deep in smids and frankly doing quite well in that space historically...but I'm feeling pretty uncomfortable about the prospects of my go-to sectors here. Overall much more uncomfortable then anytime in the last 10-15 years.