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  • Jonathan Poyer

Enter the AI Revolution - Is the Exuberance Rational?

On May 24th, the world changed. That’s the date that NVIDIA reported their 1Q23 results and raised their revenue guidance for 2Q23 from $7B to now $11B.

The reason given by CEO Jen-Sung Huang for the change was that the company had seen a dramatic increase in orders from data centers for their artificial intelligence (AI) enabling GPU. Since then, most of the major large-cap indexes have rallied to new recovery highs, but the broad market has continued to lag. In fact, through mid-year, the S&P 500’s YTD gains were largely concentrated in just a handful of mega-cap issues including AAPL, MSFT, GOOGL, NVDA, AMZN, TSLA, and META – now dubbed the “magnificent seven.”

Moreover, only 28% of the index’s constituents posted gains that matched or beat the index itself in the first half, while 35% of its constituents ended the June quarter in negative territory for the year.

The inference from NVIDIA’s announcement is that all data centers and cloud players will need to upgrade their platforms to accommodate the increasing demand for high-performance computing related to the future broad adoption of AI. Last Fall, OpenAI (in partnership with Microsoft) introduced a new software application to the public called ChatGPT. The company describes ChatGPT as an artificial intelligence chatbot that utilizes generative pre-trained transformers – a type of large language model – that allows the software to imitate conversational human interaction and perform a wide variety of information-oriented tasks. ChatGPT has since sparked a massive competitive response from a number of start-ups and leading internet and software technology companies.

Where all of this might lead is highly speculative at this point, but there are many who believe that we are on the cusp of something that could prove to be even more transformative to the world economy over the next 20 years than the internet was over the last 20 years. As such, there has been a frenzy to own the perceived leading AI companies.

AI is not new. It has been around since IBM’s Deep Blue beat Gary Kasparov in a best-of-six chess match back in 1997. What is new, is the latest bout of irrational exuberance evident in the stock market about the possibilities that AI might bring to the future revenue and earnings growth rates of the magnificent seven. Based upon their current valuations, we’d guess that these overtly optimistic investors have already priced in the next 10 years’ worth of accelerated growth – if it even comes to fruition.

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