Friends,
It's no secret that AI stocks have seen huge gains over the past few quarters. The big winners include IonQ, Oklo, and Rigetti Computing. In the year ending October 15th this year, these three returned 600%, 1,400%, and 6,900%, respectively.
We singled these three out because they have done this while effectively producing zero revenue. That's not a knock against them (quantum computing and small nuclear reactors are important innovations), but just a statement of fact.
This makes all three particularly fragile to worries about an AI bubble. As of this writing (Friday, November 14th), it appears the bubble is showing signs of strain. Since hitting those mid-October highs:
- IonQ is down over 40%
- Oklo is sitting 40% lower
- Rigetti has lost over 50% of its value
Did the AI bubble pop? Has demand all of a sudden dried up?
The resounding answer: NO!
In fact, it appears the problem is the exact opposite: there's no way that AI players can possibly keep up with demand. On his most recent earnings call, Coreweave CEO said:
"The totality of [demand] overwhelms the capacity of the market to deliver that... [It is a] systemic problem that the industry is going to have to deal with for the foreseeable future."
It's ironic.
During the Dot-Com boom, telecoms spent billions laying down fiber-optic wires to grease the wheels for the Internet. The problem was that we weren't quite ready for the Internet; demand took another 5-10 years to show up.
Today, it's the exact opposite. Demand is booming, but AI is having serious trouble scaling due to scarcity in chips, data centers, and energy.
That doesn't mean, however, that this is benign. Sure, it's better to have overwhelming demand than no demand at all. But the inability to scale could have significant effects on the valuations of these companies.
It reminds us of a key tenet of Nassim Taleb's approach to fragility: Don't try to predict what will break something that's fragile. It's enough to know that it's fragile, and at some point, something you can't predict could come along and break it.
None of this is to say these three companies are doomed. Rather, it's important to see how fragile the companies we invest in (via their moats) and the stocks of those companies (via their valuations) are when making allocation decisions.
Don't try to predict where the stress will come from. Just focus on the fragility. That alone is sage long-term wisdom, applicable to both investing and life.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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P.S. It's Official, we are splitting up our YouTube Channel. Brian Stoffel is starting a new channel that will cover earnings, his portfolio moves, and more. Subscribe to his new channel by clicking here.
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