Friends,
A funny thing happened last week. Alphabet (Google) came out with solid earnings. Search was strong; Google Cloud was strong; Profitability was very strong. By and large, there was a lot to like.
And yet, the stock fell precipitously the next day (taking much of the technology sector with it). If I were to boil the move all down to one thing, it would be this snippet from CEO Sundar Pichai. He's been asked about the billions Google is investing in artificial intelligence (AI):
"The risk of under-investing is dramatically greater than the risk of over-investing for us here, even in scenarios where it turns out that we are over-investing."
In other words, "if we're going to make a mistake, we'd rather burn a bunch of cash making this mistake than miss out on a potentially huge opportunity."
The problem has to do with the word "potentially."
Pichai is making it clear that -- no matter what -- Google's going to spend a boatload on AI. But the ability of AI to actually improve the bottom line of any company not named NVIDIA (or AMD, Taiwan Semiconductor, etc) has yet to be demonstrated.
This reminds us of the famous Gartner Hype Cycle:
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Let's break down where we likely are:
- Technology Trigger: This happened on November 30, 2022 -- the first time the world was introduced to ChatGPT
- Peak of Inflated Expectations: Between December 2022 and the beginning of 2024, any company with an AI-related angle saw its valuation increase dramatically -- far faster than AI created measurable differences in the real world.
- Trough of Disillusionment: We likely haven't reached the nadir yet, but we've been going down the slope over the last few months.
Google isn't alone. Meta Platforms (Facebook) crashed when it made a similar pledge earlier this year. And many SaaS stocks thought to benefit from the AI trend have seen their fortunes reverse quickly.
None of this means investments in AI aren't worth it. Rather, it means that we need to take the long view. It's possible our expectations for AI are getting ahead of reality. But that doesn't mean -- much like the Internet -- AI won't fundamentally change the way we live our lives.
The keys are patience, taking a long-view, and ensuring that you're putting resources behind companies that have defensible moats.
Do those things, and much of what we're experiencing now will seem like blips on the radar in a decade or two.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long Term Mindset
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P.S. We're having a "Back To School" sale on our flagship valuation course, Valuation Explained Simply. Use this link to save $100!
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