Welcome back, everyone. Today on the Joseph Carlson
Show. Is AI officially in bubble
territory? That's the question we're going
to be examining today. We know that AI has exploded in
popularity over the past couple of years.
We know that companies like NVIDIA have exploded in revenue
over the past couple of years as well.
They've had astronomical exponential growth.
And right now, Jensen Wong, the CEO of NVIDIA, is at a Goldman
Sachs conference explaining that there's so much demand for AI,
so much continued demand, that customers are getting
temperamental. They want their GP, us, and they
want them right now, and they can't even make enough to keep
up. We also know that big tech has
been spending big time on AI. The amount of money that big
tech is spending on AI is breathtaking.
And today we're going to look at the numbers, the actual data.
We'll be looking at how much each company is spending on AI
and whether or not it's in a bubble.
Now, of course, we have some other news.
We have Steve Eisman, the big short investor.
He went on to CNBC to share his opinion on the rate cuts.
We know that rate cuts are coming, talks about the banks's
investments and a bunch of other various topics.
And then we also have our first bit of news from Brian Nickel, a
preview into what he plans on doing with Starbucks.
Brian Nickel, of course, is the CEO that left Chipotle with a
very successful tenure there to take over Starbucks and fix
their problems. And the first thing he did was
release this big letter outlining everything he wants to
do. And we'll be looking at the game
plan of how Brian Nickel plans to fix Starbucks and whether or
not that plan will work. Now, let's go ahead and start
off with the main question of whether or not generative AI has
reached bubble territory. We know that generative AI is a
real thing. We've all seen examples of it in
demonstrations and illustrations of its power.
But in many cases, a real thing can still become a bubble.
Look at the year 1999, leading into 2000.
The greatest companies in the world, Cisco, Microsoft, many of
them were very real things. The Internet, the promise of it,
was a very real thing. But the insatiable demand for
investors to bid up that real thing into unsustainably high
expectations, into unsustainably high prices, caused a bubble.
And it formed the biggest bubble over the past 20 years, the.com
bubble. Now we look at the demand with
artificial intelligence and there is no debating that there
is currently massive demand for AI.
In fact, Jensen Wong just today said, quote, the demand on it is
so great and everyone wants to be first and everyone wants to
be most. What does that sound like where
people are tripping over each other to be first and to be
most? He continues on.
And this is a direct quote. We probably have more emotional
customers today, deservedly so. It's tense.
We're trying to do the best we can.
He refers to his own customers as emotional.
Emotional in their insatiable desire to be the first to buy
Nvidia's GPUs and to buy as many of them as possible.
Jensen Wong isn't lying here. When we look at the overall
demand for AI, it's hard to argue that there's ever been a
product with greater demand than the overall theme of AI and AI
products. When we look at the specific
products we can take, Nvidia's GPUs and chips, they are in
demand unlike any other product we see.
Jensen himself says that we're doing everything we can.
We can't make them fast enough. Customers are becoming
temperamental. They're becoming emotional
because they can't get our products fast enough.
That is insatiable demand. We can zoom out a bit and look
at AI as a theme. Companies that are in the AI
realm trade up multiples much higher than other companies.
NVIDIA trades at a relative PE ratio.
That's around 2 times the stock market.
It's even double what the current QQQ trades at.
It's a very expensive company based on the multiples.
We don't just need to look at NVIDIA.
We can also look at other notable AI companies.
Palantir trades at an 82 Ford PE ratio, a price to sales of 32.
That's around four times the valuation of the average
software company in the US Investors want to own these
companies. Everyone wants to own a part of
this bright future of AI because we're all convinced that AI is
changing the future, and I think for good reason.
So I fully understand that AI is real.
I've seen the demonstrations. I've seen the groundbreaking
technology. It's going to change the world
in significant ways. But that doesn't fully answer
the question of whether or not we're in a bubble.
And I believe there's more evidence to suggest that we may
be entering into bubble territory, specifically the
enormous step change in how much companies are spending money on
AI. We can take a look at the CapEx
budget of big tech companies. We can see that Amazon's CapEx
over time has gone up dramatically, exponentially,
parabolically, whatever you want to call it.
The chart has gone up multiples over just the past couple of
years. Or you may give Amazon a pass
because Amazon after all runs a very CapEx heavy business.
A lot of that CapEx has to do with their fulfillment center,
buying new warehouses, buying new trucks, buying new machinery
and tooling. So Amazon is a little bit more
messy. We don't know exactly how much
of that CapEx is going to artificial intelligence.
If we look at the other big tech companies, we can see this a bit
more clearly. Meta's CapEx has exploded over
the years, reaching $30 billion in a single year spent on CapEx.
Now, Meta does not run a retail business.
They don't have fulfillment centers and logistics.
Meta run social media websites. What do they need that CapEx
for? Well, they needed to buy those
GPUs. They need it for the race to get
as many servers, as many GPUs as possible for the promise of AI.
Google's CapEx has climbed over time as Google has gotten into
the cloud hosting business. Not only do they host their own
websites like YouTube and Gmail and YouTube TV, which are very
demanding with hosting needs, but they're also in the business
of now hosting AI. And AI has caused them to spend
increasing amounts on their CapEx.
If you notice, the most recent year on a trailing basis is a
massive step up from previous years.
We can look at Microsoft's CapEx spend and it's one of the most
jarring out of all of them. Microsoft's CapEx has doubled
since 2022, gone up from 25 billion to 50 billion and it's
going up exponentially. Every single quarter is another
huge step up in CapEx. That money is primarily being
spent on servers, AI and server infrastructure.
To put this in perspective, just these four companies spent a
combined $52.9 billion in CapEx in the most recent quarter.
That is a total one year run rate of over $200 billion in
CapEx from four companies. The sheer amount of money these
companies are spending on CapEx and the rate of growth in their
CapEx is fully unsustainable. This can't go on forever.
In the words of Herb Stein, if something can't go on forever,
it will stop. That's very simple logic, but I
think it applies to this case. Keep in mind that the
incremental CapEx spend in this space is largely attributed to
generative AI. The Wall Street Journal notes
that generative artificial intelligence has sparked one of
the biggest spending booms in modern American history, as
companies and investors bet hundreds of billions of dollars
that the technology will revolutionize the global economy
and one day lead to massive profits.
The question is when, or even whether, those investments will
eventually pay off. Apps like Open AI and ChatGPT
have attracted hundreds of millions of users, but
relatively few people are paying for the premium versions, and
businesses are still experimenting with how
generative AI can lead to their increased productivity.
The spending from big tech alone is spectacular, but it's not the
only place that has AI demand. We also know that startups and
venture capitalists are now investing more and more into AI
companies. You can see the charts here in
the explosive growth of capital that's going into AI firms.
You can also see the trends of more and more companies that are
startups becoming AI companies. At least they say they are now.
It's reached a rate of around 30% of all new companies are AI
companies. Talent is another problem.
Even people with a basic rudimentary understanding of
machine learning can now have a six figure paying job, and AI
jobs have surged plus 50% in new listings over the past year.
Companies are pouring money into AI through both expensive CapEx
investments and expensive employees.
Companies both big and small, startups, venture capitalist,
retail investors, public equity funds are pouring money into AI.
And we get to eventually see who are the real winners and losers
overtime. As is the case with any bubble,
there are companies that do exceptionally well.
They made great investments and they get great returns, and then
there's a whole lot of companies that don't turn out well that
they made significant investments and they follow
along with the pact. Their investments didn't give
them an adequate return and the stock suffers as a consequence.
Over the next couple of years, I think this is going to become
clearer and clearer that many companies in this AI spend
category were in a significant bubble, that many investors are
getting caught up over bidding companies on the promise of AI.
It'll be interesting to see which companies these are, but I
think it's a time for caution when you're looking at AI
stocks, when you're looking at this theme, with this amount of
capital pouring into a single theme, there's not going to be
as many winners as we suspect. So be careful with your AI stock
picking. Now, moving on, we get to this
interview with Steve Iseman. He's the big short investor.
He covers a variety of topics in the current market, but the
first subject he's asked about are financials.
The banks. Steve, we come to you on a lot
of issues because you have been so incredible, probably right on
some of the bets you've made. Where do you think things stand
right now for the financials because it does feel like a
little bit of an inflection point.
We heard from Bank of America yesterday saying that things
look pretty good, but you also heard from Jamie Dimon saying
that there could be some concerns out there on the
broader spectrum. You haven't been worried about
the banks in a while. You still that way.
From a systemic perspective. From a systemic.
Perspective you have. Not been buying banks but you
have not been. From a systemic perspective, I
lose absolutely no sleep about the banks.
They. Extremely well capitalized,
they're far better run, they understand their risk better
than they ever have so and there's nothing to worry about
with respect to the banks to to invest them is another story.
Yeah, you didn't like them a year ago.
How are you feeling about them now?
I don't think there's a story with respect to the banks.
I mean, I I find them to be trading vehicles.
People use them as a, a means to express how they feel about the
economy. You know, right now what's
facing the banks is the feds going to cut rates and that's
going to hurt that interest margins, which is what JP Morgan
said yesterday. Credit quality is getting
slightly worse on the margin, which is what allies said.
And people got hysterical and took the stock down over 20%.
But I I there's no story with respect to the banks right now.
His biggest take away of the banks is that there's currently
just no story there. There's no systemic risk.
We're not going to have another 2007, 2008 type of debacle.
But even as investments, I also agree with him here that I don't
see any compelling story for an investment case.
And I think even Warren Buffett agrees with him because Warren
Buffett continually sells Bank of America.
He just sold more of it this week.
So I think the banks are in a spot right now where they're
fine, they're well capitalized. He says that there's no real
issue. He doesn't lose sleep over them,
but he doesn't see them as worthy investments.
Now, moving on, we get to some post debate analysis here
between Trump and Kamala. He mentions that he was
convinced that Biden wasn't going to be the next president.
Steve Eisman so far has believed that Trump would become the next
president. But that was at a time where
Trump was facing off against Biden.
Now the calculation has changed. Came out with that prediction a
while. Ago I said that 100%. 100%
certainty it was days. I was.
Joe Biden stepped out of the
race so. In my own defence, I will say
that I made that prediction before the 1st debate between
Trump and Biden. I felt very strongly about it.
I, I, that prediction was looking really good after the
debate and I withdraw it. You know, I did not anticipate
that a sitting president of the United States was going to drop
out of out of the race as ever happened before.
I think the election is a toss up.
I mean, if I had to stake my life on it, I would say still
probably Trump wins because he'll win Pennsylvania.
But it's it's too hard to tell. I think he's correct here again.
I didn't see any path where President Biden would win re
election, especially after his debate performance.
But now the calculation has changed.
It seems like a toss up. He still says that he thinks
Trump has the edge most likely to win, but he doesn't know.
And I think right now nobody knows.
Now the next subject he talks about is an update on the
economy and specifically low income spenders.
Think now about. No, I look, there's no question
that the lower end consumers having problems, you know, you
see that in Dollar Tree, Dollar General, you saw that with Ally.
But I don't think that it is dispositive in terms of the
market or or or or the economy. I mean it means the economy is
slowing and it's definitely slowing.
But the last time the lower end consumer was really important
was 2006, seven and eight when that consumer was over levered
and that consumer was not over levered.
That consumer is just having issues in terms of income, is
not keeping up with inflation. So it is true that the low end
consumer slowing down along with the economy, we've seen a lot of
layoffs and job loss over the past couple of months.
But the good news is that they're not over levered.
It's not going to be a repeat of 2007.
There's not millions of people that have taken out more home
loan than they can pay. So as long as we avoid that
leverage, the economy should stay in good shape.
So I think once again, Steve Eisman proves to be mostly
correct with his predictions. Now moving on, we get to an
update of the news of the hotshot CEO Brian Nickel.
Brian Nickel moved away from Chipotle after having an
extremely successful tenure there, running the company with
excellent levels of success. And he's now taking on
Starbucks, which has been a troubled company over the past
five years. The news of him moving over to
Starbucks immediately caused Starbucks stock to go up 20%.
So investors are rather excited about what he's going to do for
this company. And in a new press release, he
laid out his initial plans where he sees the problems for
Starbucks and where he sees the solutions.
Now he goes over a lot of different things here, but the
big take away is he's getting back to the core.
He's getting back to the basics of Starbucks.
He's avoiding the temptation to do frills and gimmicks to gain
back customers. He's focusing on the core.
He says our stores have always been more than a place to get a
drink. They've been gathering space, A
Community Center where conversations are sparked,
friendships form and everyone is greeted by welcoming barista.
A visit to Starbucks is about connection and joy and of
course, great coffee. Many of our customers still
experience this magic everyday, but in some places, because
especially in the US, we aren't always delivering, it can feel
transactional. Menus can feel overwhelming,
products are inconsistent, the wait is way too long and the
handoff is too hectic. These moments are opportunities
for us to do better. Today, I'm making a commitment.
We're getting back to Starbucks right away.
I like his plan for Starbucks. He's focusing on the uniqueness
and differentiation that Starbucks has.
Primarily, the culture of Starbucks, having it be a third
place, a place that you can meet people, have conversations,
bring your laptop, you can work on school there, you can work on
work projects, you have free Wi-Fi, you know, it's a place
that you can meet and have as a third spot.
The other CEO that was leading Starbucks focused on trying to
make Starbucks more like the competition, making it quick,
transactional, not making it a rest place.
So he's bringing Starbucks back to its roots.
And he does this through four different commitments.
One of them is to empower the baristas to take care of
customers. He goes through how simply they
don't have the tools to keep up, so a lot of them are getting
behind. It leads to confusion and
frustration, both for the employees and the customers.
Getting the morning right. People start their day with us
and we need to meet their expectations.
This means delivering outstanding drinks and food
every time on time. The morning has been chaotic,
cluttered. In many cases, they can't get
the orders right or out on time. That's been a major challenge
for Starbucks. Brian Nichol is an expert in
logistics, in processes and getting these type of challenges
correct. So I think he's going to fix the
morning rush, the chaos. If I was to guess, I think he's
going to simplify the menu a little, not make it so that
there's so many different options for every single drink.
The trade off there is that you get better service, better
products, you erase a lot of the complexity and make it more
simple to run Starbucks. He also says he's re
establishing Starbucks as a community coffee house.
Many of the new designs they've came out with don't have much
seating area. It's mostly a place you go in,
you stand, you get your coffee and you leave.
Now he wants to make it back to a seating area, a place that you
can lounge, you can hang around, you can spend time there.
So I think this is another thing that reestablishes Starbucks and
differentiates the company. He also says telling a story,
it's time for us to tell our story again, reminding people of
our unmatched coffee experience, our rolling communities and
special experiences that only Starbucks can provide.
We won't let others define who we are.
Now that's a bit broad, but that last line's important there as
well. He's not going to let others
define who we are. Starbucks right now is being
defined as a pro Israel, anti Palestine company.
And that's not good for any international company.
When you can't control your messaging, when you let other
people, I'll define who you are, that's problematic.
So part of this is repairing the personal relations, the PR of
the company, making sure that they control the messaging, they
control who they are. I don't own Starbucks stock, but
I'd be happy with this messaging.
When I read through it, I think he's spot on with almost
everything he said. I think he's accurately defining
all the problems the company's facing, and he's coming out with
a real solutions for him. Whether or not he can actually
execute on the solutions is an entirely different challenge,
but so far, I like what I see from Brian Nickel.
I think Starbucks investors are lucky to have them.
Now. That's all for this episode.
Hope you enjoy it. See you in the next one.