Are We in an AI Bubble?

Hey,

Today's newsletter is a collaboration with my friend Timur Barotov, a great market analyst.

Over the next couple of weeks we will share some interesting market insights with you.

Stock markets today are all about one thing:

AI will change how we work and live, the same way the internet and the railroads did.

But that change takes a decade, not a couple of years.

That is the part the market does not want to admit.

Even real breakthroughs do not justify the valuations we see today, because nobody yet knows who the long term winners and losers will be.

Big technological shifts always come with too much optimism.

Investors take the potential of a new technology and apply it to almost every company connected to it.

That is usually wrong, and time tends to prove it.

The railroads did this first:

Britain in the 1840s built railways at a speed nobody could justify.

Parliament approved around 9,500 miles of new lines in four years. The whole network today is about 11,000 miles.

Everything around it boomed too. Iron, steel, coal, timber.

Then supply overshot demand, and railway shares lost more than 80% of their value by 1850.

The trains still ran. The investors were simply too early and too many.

A handful of strong operators bought the rest cheaply and consolidated the industry.

The AI buildout looks the same.

Very capital intensive, uncertain payback, and treated as a must have by every large company.

The same thing happened with the internet during the dot com bubble.

The Nasdaq lost close to 80% after 2000, and the internet still won.

When supply catches up, infrastructure providers see their margins and growth come down.

Most of the market's gains since Covid, and especially this year, came from exactly those companies.

We think we can be in the late stages of that cycle.

How to protect yourself, and maybe benefit:

One option is holding cash in interest bearing assets while you wait. Treasury bills still pay close to 4%.

The other is rotating away from the expensive names into what everyone has stopped looking at.

There are two groups worth attention.

First, solid traditional businesses that are simply overlooked - Zoetis, McDonald's, Procter and Gamble.

They are not fast growers, and that is precisely why they are ignored while attention and capital sit somewhere else.

Second, software and fintech, which the market has decided AI or industry shifts can damage.

Fiserv, Adobe, Intuit, Salesforce and Accenture have been sold off hard on that belief alone.

Several of them now trade in the low teens on forward earnings, some lower.

Remember what we said at the start.

Nobody knows how AI will affect these businesses.

We think the market has become emotional here, and that these companies are far more likely to adopt AI than to be destroyed by it.

After the railway boom, the biggest winners were not the companies that built the railroads.

They were ordinary businesses that used the railroads to grow faster and reach more customers.

We think the same can be true this time.

Many of the beaten up software and fintech companies can become those long term compounders.

That is where the opportunity is.

Do not panic. We have seen these dynamics before.

Talk soon,
Igor and Timur

P.S. Not investment advice. If you want to learn how to invest like a pro, check out my academy: https://www.mba.wildcapital.co/