To The Moon

AI investment – A boom or hype?

Money is thrown at companies that have neither earnings nor an innovative product nor the right expertise. For example, French startup Mistral AI didn’t have a working product when it raised €105 million ($118 million) in one of Europe’s largest-ever seed rounds last month. Some investors and people in the industry are worried the funding frenzy is turning into a bubble.

The realisation of AI potential -

The release of ChatGPT to the public in November was the catalyst for the current buzz, since then there is an increasing number of founders mention generative AI in their pitches for funding. The release of ChatGPT, combined with Microsoft’s blockbuster investment in OpenAI, caused “generalist investors to suddenly wake up” to AI’s extraordinary potential. It was also a moment when everyone finally got to touch the technology. $C3.ai, Inc.(AI)$

Being overvalued -

In May, $NVIDIA Corp(NVDA)$ , a US maker of the advanced microchips required to power generative AI, became the sixth company in the world to reach a market capitalization of $1 trillion. Its stock has soared by 207% since the start of the year.

But Nvidia’s stock has also traded on a price-to-earnings ratio — a measure of whether a share is over- or undervalued — of 237 over the past 12 months. The higher the ratio, the more likely a stock is overvalued. For comparison, companies on the S&P 500 have traded on an average ratio of 24 over the same period.

While Nvidia is profitable, $C3.ai, Inc.(AI)$ , an AI software company whose stock has soared over 240% this year, is not — and is not expected to be, either this year or next.

Dot-com to Dot-AI -

In the late 1990s, a firm could “just put the word ‘dot-com’ at the end of their company name, and their stock price [would go] up 10% the next day.”

As investors funneled money into dot-com companies from late 1998, the Nasdaq’s value more than doubled during 1999 alone. But, despite high hopes and huge valuations, most of the startups never generated any revenue or profit, according to Goldman Sachs. Stocks on the Nasdaq nosedived 81% between its peak in March 2000 and late September 2002. The bubble had well and truly popped.

The situation is strikingly similar to the dot-com bubble, investors told CNN. But, with every bubble, there must come a pop.

Emad Mostaque, founder and chief executive of Stability AI, a generative AI firm that also counts California-based Lightspeed among its funders, expects the current wave of investment in AI companies to create “the biggest bubble of all time.” “I call it the ‘dot-ai’ bubble, and it hasn’t even started yet,” Mostaque said recently, referring to the “dot-com” bubble of the late 1990s, when speculative bets on nascent internet companies ultimately resulted in big losses for many investors.

Picking a winner -

“Buying a ‘dot-ai’ domain, and claiming to be an AI company… doesn’t really make you an AI company,” “As investors, one of our jobs is to figure out who’s real and who’s not.”

I believe AI is the future. Comparing it to my experience with my dot-com investment journey, it took a decade for the concept of online shopping to come to pass. With my AI bet, I am expecting a lot of hope, hype, and possibly some betrayer. This could create market volatility, but it also presents opportunities down the road.

In a recent article, we connected the dots to help explain the factors contributing to the current high-interest rate environment and bank runs. We also provided insights into the risks and future opportunities that lie ahead using the 'Quantamental' approach.

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