The Sunday Drive - 06/23/2024 Edition [#116]
Musings and Meanderings of a Financial Provocateur
👋🏼 Hello friends,
Greetings from Saratoga Springs, NY. Let’s enjoy a leisurely Sunday Drive around the Internet.
🎶 Vibin'
Sometimes the proof of concept is every bit as good as an idea needs to be. I love the back story for this week’s Vibe.
Norah Jones sent a demo to Sony Records and they loved it so much they signed her to a recording contract immediately. She couldn’t wait to get into the studio to “professionally” record the songs on the demo. But the studio said, “Nope. No way. We’re releasing this song as is.” The rest is history.
This week I’m vibin’ to Don’t Know Why by Norah Jones, by far her biggest hit. The song you hear is what the record label released - the actual demo version she recorded herself.
Norah will be performing on June 30th at the Saratoga Performing Arts Center as a featured act at the Saratoga Jazz Festival in Saratoga Springs, NY.
💭 Quote of the Week
“We are in the business of making mistakes. Winners make small mistakes; losers make big mistakes.”
— Ned Davis
📈 Charts of the Week
The Charts this week are drawn from an interesting piece on market concentration by Michael Mauboussin of Morgan Stanley. This is an important topic and one we discussed in last week’s Sunday Drive.
Yes, the U.S. stock market is quite concentrated by historical standards, but compared to other global markets, not particularly so.
Let’s talk a little bit about how we got here and where the AI bubble may take us in the coming months.
According to research from Empirical Research Partners, the basket of AI related stocks currently trades at roughly 1.4x the market’s forward P/E multiple. That’s essentially in line with the relative multiple at which they’ve traded over the last few years, despite their significant outperformance.
So, unlike prior bubbles, the current period of outperformance of the biggest names hasn’t really come from multiple expansion but rather outsized earnings growth.
Again, according to Empirical, estimates for Nvidia’s 2026 data center revenues will total more than 10% of market wide capital spending! This is in the same ballpark as IBM’s share of capital spending at the peak of the Mainframe era in the late 1960s, and Cisco Systems, Lucent, and Nortel’s combined share of capital spending at the peak of the Internet bubble in the early 2000’s.
Regardless of the long term benefits of AI on economy wide productivity, of which I believe there will be many, the current rate of spending seems unsustainable to me.
I’m not forecasting an imminent end to the AI capital spending cycle by any means. What I am saying is that I believe we’re likely in the latter innings of this cycle. It’s increasingly important to watch for warning signs for a slowdown in that spending which will lead to significant weakness in the names that have performed the best in recent years.
🚙 Interesting Drive-By's
🤔 Software is Why Nvidia Will Not Become Cisco - from Kevin Xu [$Link]
Note: A counter argument to the comments above. $Paywall for full article.
💡 LLM’s Turn Every Question Into an Answer - from Dan Shipper [Link]
💰 Visualizing the Training Costs of AI Models Over Time from The Visual Capitalist [Link]
📈 The Age of the Sovereign Creator - from Hamish McKinzie [Link]
🤓 I found this and thought it was super cool (in a math nerd sorta way). So… I did what a good analyst would do and checked it out for myself. According to Microsoft Excel, the product is 12,345,678,987,654,300. However, according to Wolfram|Alpha, the below figure is correct. 🤷🏼♂️
👋🏼 Parting Thought
If you have any cool articles or ideas that might be interesting for future Sunday Drive-by's, please send them along or tweet 'em (X ‘em?) at me.
Please note that the content in The Sunday Drive is intended for informational purposes only, and is in no way intended to be financial, legal, tax, marital, or even cooking advice. Consult your own professionals as needed. The views expressed in The Sunday Drive are mine alone, and are not necessarily the views of Investment Research Partners or Cache Financials.
I hope you have a relaxing weekend and a great week ahead. See you next Sunday...
Your faithful financial provocateur,
-Mike
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