u/Western-Safety-8346

When Allbirds (a cash burning DTC shoe company) announced they were shifting their business to AI, the stock jumped 500% in a day. This triggered AI bubble warnings in my head. I saw this same trend during the Crypto craze and Dot com bubble. Companies stock surging on the hype of a name change with no fundamentals to support it.

So, I decided to dig deeper into the AI bubble (if there is one). When you look at the broader stock market fundamentals we are reaching higher and higher P/E ratios everyday but not that close to dot-com bubble levels. Other indicators like the Buffett Indicator which is the ratio of the total U.S. stock market’s value to U.S. GDP, which means has the stock market grown too large relative to the real economy and the Shiller P/E ratio which measures the S&P 500’s price against the average of the past 10 years of inflation-adjusted earnings have reached record highs (so at this point I have mixed results and further dive into the bubble).

Next, I looked at LLMs (the AI godfathers) these companies are valued at billions near trillions yet burns billions in cash every year. At these valuations immense growth will only meet expectations, while any slow down in revenue growth will send the LLM equities plummeting. A slow down in LLM technology wouldn’t be such a crazy thing. We have seen LLM developments begins to slow down. OpenAI had to delay GPT-4 because it fell below their expectations. Just because they continue to feed these algorithms tons of information doesn’t necessarily mean it will improve the AI.

Lastly, there are the AI chip companies. First, some of these stocks the hype has clearly exceeded anything fundamentally based. Look at $PLTR currently trading at an astronomical 145x forward earnings or snowflake who has lost billions or bloom energy who is breakeven profitably (there are many more examples just to pull a few).

What about all the stocks like $NVDA and $MU that continue to crush revenue and earnings projections every quarter. These stocks are also not insanely valued and trade at respectable P/E and P/S ratios. These AI chips gains are built on a vulnerable cycle. This hardware revenue is not being generated by demand from traditional businesses successfully deploying AI to increase their own profits. In fact, a recent report from the MIT Media Lab found that an incredible 95% of enterprise investments in generative AI have produced zero measurable financial returns. So, if traditional businesses aren't seeing returns, who is buying all these chips? The answer is a closed loop system financed by venture capitalists and big tech companies.

Here is how the system works. LLMs created a fantastic technological advancement attributed to AI. Venture capitalists and huge tech companies get FOMO (fear of missing out) and begin pouring billions if not trillions of dollars into the AI industry. All of these AI companies rely on these limited chip suppliers. So as a result the suppliers have done amazing and AI hype continues to grow. But, other than these chip suppliers, none of these companies have proven they have profitable and sustainable businesses. Eventually, these huge companies, venture capitalists, and investors are going to need a profitable return on their cash. When the market realizes that the end-consumer economy cannot support this infrastructure spend (Think about the last time you have used an AI product other than an LLM), the funding will dry up and that is exactly when this entire house of cards will collapse.

To read my entire write up on the AI bubble check out this link: here

I started writing a substack this year to test and show my ideas, I know I need to write more actively now that I am more free. https://substack.com/@catalystinvesting?r=7696qw&utm_campaign=profile&utm_medium=profile-page But how can I best position myself to start a fund?