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We hope everyone is enjoying the extra day this leap year.  I’m sure some investors wished that February would last much longer considering some of the gains we’ve seen this month.

The major indices are picking up where they left off last year with returns approaching 7% for the S&P 500 and NASDAQ as of this writing.

But the real story so far this year has been the fervor around investments in artificial intelligence stocks and specifically, Nvidia.  Nvidia has been the poster child for the AI revolution and the potential it has to transform the economy.  The stock had already gone on a massive run and was priced for perfection going into its earnings report last week.  To say they delivered would be an understatement.

Revenue is up 265% year-over year.

Net income is up 769% over the last year.

Net profit margins are now 56%!

Charlie Bilello

The stock is now up over 50% on the year and is the third largest in the world behind Apple and Microsoft.  It also sounds like their growth will continue as the company is struggling to keep up with demand.

Voracious demand has outpaced production and spurred competitors to develop rival chips.  The ability to secure GPU’s governs how quickly companies can develop new artificial intelligence systems.  Companies tout their access to GPU’s to recruit AI workers, and the chips have been used as collateral to back billions of dollars in borrowing.

The chips are so valuable that they are delivered to the networking company Cisco Systems by armored car, said Fletcher Previn, Cisco’s chief information officer, at The Wall Street Journal’s CIO Network Summit this month.

NVIDA Hits $2 Trillion Valuation on Insatiable AI Chip Demand

After reading this you might be temped to cash out your 401k and go all-in.  Unfortunately, some classic “bubble” signs are surfacing in and around the stock.

Option traders, typically looking for a short-term profit on the direction of a stock, are now placing their bets on Nvidia and can cause the price of the stock to fluctuate wildly.  $.25 of every $1 spent on options last month were bets on Nvidia.

Reuters Graphics

Other, lesser known companies are starting to benefit from being associated in the same sphere as Nvidia. Stocks like Arm Holdings, Super Micro Computer, Palantir, and SoundHound have all skyrocketed this year with investors trying to bet on the next big thing.

Companies that mention “AI” in their earnings calls are now up to 36% of the S&P 500.  Jeff Bezos and a cohort of big technology companies just raised $675 million for a startup that is going to try to build humanoid robots.  Sam Altman, the CEO of Open AI, wants to raise several trillion dollars to reshape the global semiconductor industry.

We could go on with these examples, but this is starting to feel very similar to the late 90’s and the dot-com mania.  And while it’s hard to say any of these companies will go the way of, perhaps a better cautionary example to look to from that era is Cisco Systems.  For those that don’t remember, similar to Nvidia with AI today, investors were hungry for companies that were supplying the hardware to the burgeoning internet industry.  Cisco Systems was one of the darlings of that group.

At the turn of the new millennium, the IT hardware, software, and networking equipment company was one of the hottest stocks in the US equity market.  From the beginning of 1999 to March 2000 the shares rose 236 per cent to a market capitalisation of $555bn, or $80.06 per share, backed by a crazed enthusiasm for the technological shifts brought about by the internet.  The thesis was solid: as a provider of networking equipment for both telecom players and other businesses, Cisco was the shovel-seller in a dot com gold rush.  What could go wrong?

In one way, investors were right.  Cisco was a big winner.  Over the next 21 years, Cisco’s revenues grew four-fold to $49bn, with profits quadrupling to $11bn.  


The problem?  Investors paid way too much for the shares in 2000 and the share price cratered.  If you bought shares of Cisco at their peak in 2000, it took you 21 years to get back to even.  21 years!  Even companies that came to dominate the internet like Amazon and Microsoft took almost a decade to break even after the dot com bubble burst.

It might be obvious, but the problem with investing in themes is that you can get the company and the story right, but if you pay too much for the stock it doesn’t matter.  It’s hard in the moment to know if you’re buying the next Apple or the next Global Crossing.  It will be fascinating to watch this play out as there will sure to be plenty of examples of booms and busts.

And finally, you might think that AI might not be able to disrupt certain industries like, say, fast food.  Well, Wendy’s has something to say about that – they plan to add surge pricing and AI menus to customers next year.

Patrons of Wendy’s may soon pay varying prices for their burgers, as the fast-food chain intends to bring Uber-like surge pricing to its menu.

“As early as 2025, we plan to test a number of features such as AI-enabled menu changes and suggestive selling based on factors, such as weather, that we think will provide a great value and an improved customer and crew experience,” a Wendy’s spokesperson told CBS News in an email. 

If they really increase the price of a Baconator, I guess we can just go to In-N-Out.

Wendy’s Explores Bringing Uber-style Pricing to its Fast-Food Restaurants