Dot-Com Bubble vs AI Boom: What Today’s Investors Are Missing

During their recent episode, Taylor, Carlisle, and Zeke Ashton discussed Dot-Com Bubble vs AI Boom: What Today’s Investors Are Missing Here’s an excerpt from the episode:

[Zeke] Yeah, I do think that each of them is quite different in their own way. My personal view is that December of 2021 was the most speculative market that I’d seen just in terms of like people buying shiny trinkets, knowing that they were shiny trinkets. If you look at the kind of the definition of speculation, which is, hey, I kind of know this thing might, might or might not be worth what I’m paying for it, but I’m just betting that somebody else will pay me a higher price.
I think that was 2021. And of course, I think that was driven by a lot of pandemic era, you know, sort of dynamics where, you know, there was a lot of people that couldn’t bet on sports anymore. There were a lot of new things going on in the crypto world.

And also, I think social media magnified a lot of those trends because people were at home and, you know, didn’t have a lot to do. So now 2020, I mean, I do think people forget just how, you know, the growth rates were for these, you know, big tech companies. I’m talking about Dell and Intel and Microsoft.

You know, they were growing at very fast rates in the late 90s. And Cisco continued to grow at reasonably fast rates for another 10 years after that. And it took, I think, until this last year for Cisco to get back to its peak valuation of early 2000.

So, you know, I think that’s pretty incredible. What I would say today is, and what I find difficult is, yes, you know, when you look at Meta, when you look at NVIDIA, when you look at Google or Alphabet, whatever you want to use for they generate an amazing amount of cash flow from their business, their core businesses. So I’m talking about operating cash flow.

But what’s interesting is that those businesses are no longer capital-like businesses to the extent that they’re now spending. There’s no free cash flow at Meta anymore. There’s not any free cash flow, I think, at Google anymore.

Microsoft has still generated a lot of free cash flow. So the one big company that appears to have been, you know, I would say completely absent from the CapEx arms race is Apple. And so they still generate a lot of free cash flow.

But I think the question is, is it the kind of thing where this CapEx cycle is a three-year cycle and then they go back to being capital-like businesses that generate a tonne of cash, in which case they all look very attractive today. However, if this is a CapEx trap where, you know, they have to continue to spend money to stay at the leading edge of LLMs or whatever they’re trying to do, then I think the valuations have to come down, right? And I also think there might be some differentiation, at least in my mind, between the companies for whom this feels like it’s existential and those that maybe it feels like it doesn’t.

Like, I think Alphabet really has to defend their search business with everything they have because it’s such a powerful, so such a profitable business. Whereas Meta, in my mind, I’m not sure why they need to invest in a leading-edge LLM. I think that if it helps make their advertising business more efficient, that’s great.

But it feels to me like it’s not necessarily existential for them and therefore they could cut back earlier than some of the other ones. So, but look, I guess my thought is I think about this a lot, but I realise that I’m not the guy who’s going to figure it out. What I will say, though, is that the transition from, you know, just incredible free cash flow to very little free cash flow.

And then the other thing I would mention on all of them is there was never, I mean, Cisco certainly had a huge amount of customer concentration to a type of customer, but not really to any single customer. Whereas if you look at the CapEx requirements that are coming mostly from Anthropic and OpenAI, if something bad were to happen at one of those two companies and they were not able to honour the agreements they’ve made, I don’t know what that means. And I specifically am worried about OpenAI because it feels like they’ve fallen behind at least until very recently.

And it seems like they still need a couple hundred billion dollars of capital to bridge them to whatever their ultimate profitability is going to be. So these are concerns I have. Again, I’m not the AI guru.

I don’t pretend to be, but I do think about it a lot. I do worry about it probably more than some. And I think that like a lot of value investors, particularly, I’m struggling with how to think about this transition from what have historically been just dominant, you know, capital light businesses to still dominant, but now capital heavy businesses.