The definition of external obsolescence principally applies to real estate. One real-estate firm explains that “…external obsolescence is something outside of a property, off-site, that negatively affects its value. Definitions of external obsolescence often include the chilling term “incurable,” and examples are trains, traffic, commercial properties, institutional properties, geologic conditions, and industrial installations.”[i],[ii]
Very simply, if you buy a dream home near a chunk of empty land zoned for industrial use and somebody builds a giant manufacturing plant there, it could turn that dream into a nightmare. We think the analogs with AI and technology stocks are appropriate. The term “incurable” strikes us as particularly apt.
From everything we can gather, investing in tech stocks today has largely become analogous to buying homes valued at extraordinary premiums based on the belief that they are “perfect.” Unlike homes, however, there are no zoning rules governing what external forces might appear next door. The advent of AI seems to have made previously impervious moats look highly vulnerable.
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You wouldn’t know it from the headlines. Consider the following five quotes:
“Microsoft is arguably one of the leading AI companies right now [and] future revenue growth could come from the massive AI software market, which will be worth an estimated $850 billion by 2030.”[iii]
“Apple has some core differentiators when it comes to anything it does in AI…Apple develops some of the best semiconductors on the planet for every category of product it makes. The Mac is the most capable computer on the market to run generative-AI applications.”[iv]
“[Google] said that it’s implementing new AI features into its workspace apps, Android operating systems, and Google Cloud, and adding AI across 25 apps and services.”[v]
“Nvidia’s management highlighted the company’s current AI focus on its call, saying that it achieved record data center revenue because of AI.”[vi]
“Amazon is the AI stock to watch for the next decade. … In e-commerce, AI is already transforming the customer experience and improving operational efficiency. Meanwhile, AI is transforming AWS cloud offerings and driving new revenue opportunities.”[vii]
The market has deemed these 5 stocks the AI winners. How else do we know? Consider the chart below.
Since the trough of the GFC, we can see the various growth rates of earnings, sales, R&D, capital expenditures, and…market cap. The numbers tell a story of extraordinary earnings and sales growth. But costs – both expensed and capitalized – have grown faster. Despite this, these five firms’ market caps have grown an incredible 20-fold. This is multiple expansion gone mad.
Why would we suggest the multiple has gone mad?
Well, the very reason for this most recent “echo-bubble” is
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June 8, 2023 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
June 8, 2023
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
