"On its own, the price of Nvidia is responsible for an enormous slice of the stockmarket recovery. Since the end of November the firm’s market capitalisation has soared from under $400bn to $925bn—accounting for a fifth of the rally. Add Nvidia’s surge to the growing market capitalisations of the 13 other firms with ai exposure and a remarkable 73% of the broader rally is explained."
"In November the average price to current earnings multiple of an s&p 500 firm, excluding the 14 most exposed to ai, was around 27. As we went to press, the multiple had dipped to 26. Meanwhile, the average multiple of firms in our ai bucket had leapt from 43 to 77."
Not sure what you would expect - they just point to the fact that most of the rally is achieved through the 'AI' companies - the rest of the index is actually down, or mostly down. That's fact. What more do you want to be more persuasive ?
Almost all of S&P 500's recent rally has come from 5 companies - Nvidia, Apple, Google, Microsoft and Amazon (https://www.axios.com/2023/06/01/sp500-tech-companies-stock-...). Are they all "AI companies"? Sure, but they also do basically everything else. So it's still a pretty flimsy correlation.
A more reasonable explanation is that there was an overcorrection in big tech valuations during the downturn a couple years ago (while they are all continuing to make record profits quarter after quarter), and now after layoffs and cost cutting the market is slowly normalizing in their favor.
Amazon and Apple are a bit different, but Nvidia and Microsoft are purely seen as 'AI' play (MSFT through Open AI) as far as I know. Google indirectly profits from that too.
Microsoft is a huge conglomerate and the vast majority of their revenue has nothing to do with AI. Moreover, they have a partnership with OpenAI, but it's not at all clear that their lead is going to stick long enough to turn it into anything. Everybody is doing research on this now and all it takes is for somebody else to do it better.
chat.openai.com has about 2B visitors per month with an average visit duration of 7 minutes (https://www.similarweb.com/website/chat.openai.com/). It is not unreasonable to expect that every visit costs OpenAI about $0.10 dollars; which they pay directly to Microsoft. In effect, this means that Microsoft's revenue is 200 million per month or 2.4B per year if this continues like this. That's already equal to 1% of Microsoft's total revenue of 2022. Note that this is chat.openai.com only but I can imagine that the API also has quite some traffic. Oh and wait, on top of this Microsoft has a 49% ownership of OpenAI and OpenAI is still the best LLM in town, so it's not unreasonable to expect further growth.
> [...], but it's not at all clear that their lead is going to stick long enough to turn it into anything
People are saying that since January, but here we are in July and GPT-4 is still the best model. While everybody is catching up, they have (1) the processes in place to come up with new ideas and get them working (2) a head-start of many months (note that GPT-4 was basically done in Sep 2022).
If you look at the profits these companies are making - with ~zero of it coming from AI products at the moment - the valuations are in fact conservative.
P/E ratios of Google, Apple, Microsoft are all in the 25-30 range, which is not abnormally high. Amazon's P/E has always been wonky because it rarely posts high profits. Nvidia is the current outlier, and I think everyone is in agreement that it is entirely fueled by AI hype.
And Google's rally corresponded to their very successful set of announcements in the AI space at Google IO (and also a profit expectation beat to be fair).
Successful announcements doesn't make an AI company, paying customers do. In zero interest rates you can instead make investor hype your product so they increase the share price, but it doesn't work forever.
> Yep. Like a neural network powered search engine, right?
They've already got that - it's those text snippets. They're quite unreliable, so a reliable one would be different of course.
But Google doesn't get paid to provide search results, they get paid to show ads you click on. It doesn't seem to me this is the same product as AI that shows you text summaries of search results.
Worse, if you mine all the content out of search results instead of making users click on them, why will people even make new webpages for you to show in the results?
"On its own, the price of Nvidia is responsible for an enormous slice of the stockmarket recovery. Since the end of November the firm’s market capitalisation has soared from under $400bn to $925bn—accounting for a fifth of the rally. Add Nvidia’s surge to the growing market capitalisations of the 13 other firms with ai exposure and a remarkable 73% of the broader rally is explained."
"In November the average price to current earnings multiple of an s&p 500 firm, excluding the 14 most exposed to ai, was around 27. As we went to press, the multiple had dipped to 26. Meanwhile, the average multiple of firms in our ai bucket had leapt from 43 to 77."
Not sure what you would expect - they just point to the fact that most of the rally is achieved through the 'AI' companies - the rest of the index is actually down, or mostly down. That's fact. What more do you want to be more persuasive ?