As AI Software Gorges on Funding, are we taking the Oil and Gas Sector for Granted?
Our recent pieces, How to Value Tech Companies and External Obsolescence: Tech Investors’ Newest Nightmare?, discussed how AI algorithms, big data, and machine learning could be undermining the moats of tech stocks that now sport multiples last seen during the dot.com mania. We noted that our empirically driven and evidence-based models had kept KCR overweight tech for nearly our firm’s entire 13-year operating history. Those same models finally went underweight tech in December of 2021.
Our general observation in those pieces was that the extraordinary run in a select group of tech stocks this year was driven largely by empirically dubious stories. Today’s missive has a simple goal: to contrast the euphoric narrative tropes about the digital transformation from AI with the oil and gas industry to highlight just how ridiculous the market’s pricing structure has become.
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The “Oil and gas, AI” comparison strikes us as the ultimate in contrasts. Intangibles vs. tangibles. A sector associated with a future of allegedly infinitely scaling profits vs. one that, while essential to basic human life, has been deemed obsolete. Optimism vs. pessimism.
Before diving in, let’s just take a quick look at price. What investors are valuing the two industries at. The light blue line shows that US Tech stocks are now valued at roughly $12 trillion US dollars. In contrast, the navy-blue line shows that the US Energy sector is valued at just shy of $2 trillion and falling.
So, investors believe US tech stocks are worth a solid $10 trillion dollars more than the US energy industry. How much of that valuation disparity is due to sentiment vs. fundamentals? While using an admittedly naive framework, this paper suggests that one credible answer is “all of it.”
We believe a reasonable person can conclude that the entire $10 trillion valuation discrepancy between oil and gas companies and tech valuations is based on investors’ assumptions about the future.
Having led out with a low-key assertion like that, KCR asks that you read the four quotes provided below: