Nvidia has become a household word these days. As a holder since 2015, I have experienced the growth stages of the stock—along with the sell offs—for almost ten years. Some of those stages were short lived—like the crypto mining rush and the gaming rush. Today’s almost universal worshipping of the company has a very different tone though. There are few investors taking the other side of this trade. Here are some of my concerns:
- Circus-like atmosphere around NVDA’s earnings announcements: Countdown clocks, near continuous coverage the day before earnings, and general analysts’ positive coverage of NVDA are all at the highest possible level.
- Entire nuclear power plants dedicated to AI only. Am I the only one that thinks this is excessive? For example, Google will use nuclear reactors to power its AI centers—for what? To have a more analytic answer to “would you like fries with that?” So far, we can only speculate on the benefits.
- CEO Jensen Huang’s growing media halo: The media has crowned him the “Godfather of AI” with Nvdia’s “flawless” earnings results. I bet Jensen Huang never expected the company he founded would end up being at the center of the AI universe. I have watched this engineer evolve to a philosopher to keep up with the public’s strong interest in AI. Quotes like “We are at the beginning of a new industrial revolution” are untypically sweeping for a CEO of a publicly traded company.
- Typical healthy skepticism is gone: For the past eight years I was on the positive side of NVDA, and there were lots of skeptics. There were plenty of “sell” recommendations. Current professional coverage—as well as general media—is uniquely polarized in one direction: Extremely positive. A daily search of the news headlines for NVDA produces phrases like “strong buy.” “blowout,” “the world runs on Nvidia,” “remains strong” and even “safe haven.” There appears to be no healthy skeptics.
- Investors are blind to valuation sleight of hand. Any investment can be made to appear cheap on a forward price/earnings (P/E), price/sales (P/S) or P/E to growth rate: just inflate the forward sales or earnings expectations. When this bubble starts to show signs of fatigue, forward sales will start to drop as they should.
- Scant attention/understanding regarding AI: Billions of dollars have already been spent on an AI buildout, and many more dollars will be spent. All CEO’s struggle to articulate why they are investing, however. When asked about specific examples of how AI will improve results, they don’t have concrete answers. Typical answers are variations of “our competitors are spending, so we need to keep up with them.”
This last point troubles me the most. Why are investors so enchanted by AI?
AI has seduced investors, companies and curious onlookers with its potential to reshape industries. From IBM’s Watson to ChatGPT’s ability to mimic human conversation, we’ve come a long way in “narrow AI” advancements. These narrow successes pave the way for dreams of “general AI”—a system that truly mimics human intelligence. But the road from wishful innovation to transformative reality has yet to be constructed. We should expect AI advances to show up in repetitive tasks, call centers and other low-level functions. But we should be careful thinking that AI will advance beyond that.
Why is that? Despite its early wins, AI still trails behind in the simplest of human tasks. It can play chess, write college admissions essays and solve complicated equations but ask it to play charades or navigate a tumbleweed on the highway and you’ll be very disappointed. Computers excel in training and processing unimaginable amounts of data. But intelligence that rivals the human brain—running on 0.3 kWh and the size of two fists—is still a distant dream. Investors have largely ignored this observation. While “breakthroughs” dominate headlines, the underlying theoretical progress remains slow. Theorists are leading the way, questioning fundamental approaches, while experimentalists—the coders—tinker with existing frameworks. But you can’t invest in theorists. Investors have worked around this by identifying other ways to invest.
Last year, two paths emerged: bet on the builders (companies creating AI products) or the suppliers (the “pick and shovel” providers). Mark Twain famously quipped, “When everyone is looking for gold, it’s a good time to be in the pick and shovel business.” Nvidia, as a supplier of GPUs, has become a cornerstone of AI infrastructure. So far with Big Tech spending at an all-time high—fueled by a fear of being left behind—the pick-and-shovel approach has been paying dividends. But I don’t think this trend can continue indefinitely.
At its core, AI today is more artificial than intelligent. While the technology marches forward, human common sense—embedded in our brains, shaped by bodies and honed through experience—remains far out of reach. The AI gold rush may continue for now, but savvy investors will look beyond the glitter to the tools fueling the frenzy.
Here are two early warning signals I have used to as AI sell triggers:
- The Better Mousetrap: The emergence of disruptive technologies like DeepSouth AI could be better solutions. This is little-followed Australian company is using off-the-shelf components to create brain-inspired systems (neuromorphic computing) that are dramatically more efficient—and much cheaper.
- The Great Enlightenment: CEOs may be waking up to the reality that overinvestment in AI, without a clear payoff, is unsustainable.
DeepSouth and other inventions might be that better mousetrap. Yet hardly anyone is considering this possibility. If DeepSouth’s pending demonstration is successful it could shift all business away from Nvidia in a short time. It could transform the entire industry and produce many casualties. Regarding the Great Enlightenment, a few analysts are beginning to ask about the buildout and timing of possible dividends. So I think the dawn of the Grate Enlightenment—that forces a reevaluation of today’s runaway spending—has begun. AI-related stocks are riding high, but a large selloff could be on the horizon as the Great Enlightenment and Better Mousetrap gain momentum.
While riding the AI wave has been exciting and profitable, it may be time to consider stepping off the surfboard.
Disclosure: Andersen Capital owns the referenced stocks in this article. Investment Advisory Services offered through Integrated Advisors Network LLC (IAN) a Registered Investment Advisor. Andersen Capital Management and IAN are not affiliated.
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