Whenever major tech stocks have corrected in the last year, a chorus of bubble wailers has found a voice. Most of this crowd refuses to attempt to learn transformers’ staggering abilities for what they are and continues to find some pattern from a long history to make their case. Their current arguments revolve more around the wasteful nature of capex.
The catchphrase is “Where's the killer app?” The path is to calculate the revenue increase of upstream players like NVIDIA/hyperscalers and compare them to software companies’ revenues. The assumption is that upstream capex must translate into a specific downstream revenue multiple based on the last 15-20 years’ history. The lack of immediate software revenues prompts them to declare the Gen-AI boom a bubble without utility, an argument flawed on several fronts.
In the worst case, the classic Keynesian mechanism for the global economy needs to be noticed. Despite rising debt capital costs, the cost of equity for risk capital funding this capex is falling, acting as a massive Keynesian driver. This capex wave funded by giant tech's cash piles, one of the largest in history, sustains the global economy through jobs, consumption, and ancillary activities. Think of Y2K type "dig holes and fill them up" utility: with no other major global economic growth drivers in the absence of monetary or fiscal expansions, AI capex serves as a Keynesian stimulus.
In reality, this is not about filling holes but about laying the foundations of a new era. Gen-AI fundamentally differs from the internet boom, characterized by long-duration, high-value investments extending far beyond chatbots and co-pilots. Those fixated on software revenue ignore the green shoots of hardware revolutions underway. We're about to simultaneously witness multiple transitions akin to the shift from brick phones to smartphones and desktops to laptops. This will usher in new hardware categories in humanoids, leading to a multi-trillion-dollar consumer market.
The flip between software/hardware is not just a trend for market analysts but a crucial shift that all businesses need to be aware of. Many Internet-era business dictums are being upstaged – some we have discussed repeatedly for months. In short, we have entered a different super-charged innovation era, where many “returns” will come in the form of new drugs and superior materials, to name just two. A lot of attempts will fail, providing the fodder to the deniers. We are also mindful of many unsavory business practices that rightfully need to be criticized and even investigated. However, it is unlikely that the world’s best brains, capital, and massively enhanced machine abilities are not going to yield path-breaking new products and services. One can keep focusing on what is not being done or endlessly discuss the misses along the way, or focus on the transformations nobody could have predicted even a few quarters ago.
