Understand the AI Bubble: Look to Historic Tech Revolutions

Goldman says AI and tech are not bubbles, but history disagrees.

Goldman Ai To Buy Or Not To Buy

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Goldman Sachs declares that there is no AI bubble, but history disagrees with this assessment as Goldman takes a second look at AI.

This paper reads like an apology tour for a recently published paper that was highly critical of AI! (See below)

Did Goldman’s big tech clients complain?

It still is a FABULOUS read that covers almost 600 years of new technologies back to the printing press. Goldman shows that world-changing technologies may create bubbles and generate relatively small returns for investors compared to those generated by the new innovations and industries that follow. 

Researchers found that for new technologies, “excitement often turns into an obsessive fervor with investors clambering to get exposure to the theme at any price. That’s when bubbles emerge and, eventually, burst. A recent study found that in a sample of 51 major tech innovations introduced between 1825 and 2000, bubbles in equity prices were evident in 73% of cases.”

READ THE ORIGINAL RESEARCH REPORT CRITICAL OF AI HERE:

GenAI: $1 tn Spent With Nothing to Show For It?

👉TAKEAWAYS

• The technology sector has generated 32% of the Global equity return and 40% of the US equity market return since 2010. This has reflected stronger fundamentals rather than irrational exuberance.

• In our view, the technology sector is not in a bubble and is likely to continue to dominate returns.

• However, concentration risks are high and investors should look to diversify exposure to improve risk-adjusted returns while also gaining access to

  potential winners in smaller technology companies and other parts of the market,

  including in the old economy, which will enjoy the growth of more infrastructure

  spend.

• Historically, investors over-focus on the originators, understate the impact of competition and overstate the returns on capital invested by the early innovators.

• At the same time, investors tend to underestimate the growth of new entrants to the industry that can piggyback off the capex of others, enabling them to generate new products and services.

• While the protective ‘moats’ around the current AI winners are significant, and valuations are not bubble-like, the number of new patents in this area is growing rapidly, suggesting that new competitors will emerge and costs will come down.

• While the hyper-scalers have huge scale and ability to invest in proprietary AI models, cheaper open source alternatives are emerging at a very rapid rate.

Innovation has a profound impact on even the largest companies. As the Fortune 500 demonstrates, many with dominant market caps and near monopoly power have fallen.

👊STRAIGHT TALK👊

Goldman goes out of its way to ensure readers that tech stocks and AI are not bubbles while citing statistics showing that most disruptive technology (73%) historically creates bubbles.

If this seems contradictory, I agree, and I believe the historical data more than I do Goldman’s analysts.

Then Goldman gives themselves the ultimate way out if investors lose money in AI:

“The infrastructure left behind in the wake of the initial investor surge and capex leads to the emergence of new products and services. These are often underestimated or poorly anticipated.”

This may be true, but it is of little solace to “initial” investors in Radio, Telegraph, and Canals who lost their shirts!

AI investors today are taking that same risk and are hard-pressed to understand what AI infrastructure will be “left behind.”

AI will be transformational, but many investors will likely be in the 73% bubble club.

Thoughts?

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