Let’s start by saying: buy the pullbacks. We are long-term bulls – how can you not be?
That said, we are still in the very early innings of what artificial intelligence (AI) will be in the future and the profitability and uncertainty is significant. The AI trade has decades of impact to fully play out in markets and society.
The wheel, the steam engine, the semiconductor, the internet and now AI all had long-term productivity enhancing impacts. By-and-large, technology breakthroughs like this are disinflationary to be sure.
There have been other technology breakthroughs, but when studying who wins in the long run, the answer is typically the multiplier on ARR (annual recurring revenue). Today, those multiples are enthusiastic guesses leveraged by hype, speculation and a bit of irrational exuberance.
In recent weeks, podcasts like All-In and others have featured discussion on the topic, and we have started to see some rationalization come in. An index was developed to track the revenue side of token costs for utilizing AI.
In the chart we are looking at today, I have overlayed the two ETFs I use to track the sector. AIQ (Global X Artificial Intelligence & Technology ETF) and BAI (iShares A.I. Innovation and Tech Active ETF) are passive and active exposure to the basket of AI related stocks.
In recent weeks, concerns of China exporting cheaper and “equivalent” AI tools and materially cheaper costs seems to be weighing on the sector. I know we are concerned about managing runaway AI costs in our business.
While there are bubble-like behaviours in AI in the past year, we do not see this as anywhere close to the late 1990s internet bubble. Intel, Cisco and Nortel were a few of the leaders of the day.
The next chart shows the percentage gains of the names of the day and the first part of the declines when the bubble burst.
We are nowhere close to this point today. The IPO for Anthropic due later this year will be an important benchmark.
For the AI fans out there like us, follow this new index and it should help in terms of understanding the revenue side impact.
For now, corrections should be bought and expect volatility to remain elevated.
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