I think the strongest case for AI stocks being overpriced is to ignore any specific facts about how AI works and take the outside view on historical market behavior. I don’t see a good argument being made in the quotes above so I will try to make a version of it.
I’m going based on memory instead of looking up sources, I’m pretty sure I’m wrong about the exact details of the claims below but I believe they’re approximately true.
The Mag 7 have a P/E of 32. Historically, when companies had a P/E of 32, their average future returns were much worse than average (my guess would be 0–3%).
A study looking at the performance of the #1 market cap company found that the top company almost always went on to underperform, which is an argument against buying Nvidia in particular.
Nvidia as a % of the total world market cap is currently the largest any company has ever been in history. When things go outside the normal historical range, that generally suggests the price is unsustainable.
Historically, the market has systematically over-extrapolated earnings/revenue growth. Companies with excellent earnings growth for years 1–3 tend to have merely above-average earnings growth for years 4–6, but they’re usually priced as if they’re going to continue to have excellent earnings growth. Although that’s just an average, and companies with very high market expectations still exceed expectations something like 40% of the time.
Stocks and industries tend to exhibit 3–5 year mean reversion, i.e. stocks that perform particularly well for 3–5 years on average underperform the market over the following year.
(These are five different perspectives on the same general market phenomenon, so they’re not really five independent pieces of evidence.)
On the outside view, I think there’s pretty good reason to believe that AI stocks are overpriced. However, on the inside view, the market sort of still doesn’t seem like it appreciates how big a deal AGI could be. So on balance I’m pretty uncertain.
I think the strongest case for AI stocks being overpriced is to ignore any specific facts about how AI works and take the outside view on historical market behavior. I don’t see a good argument being made in the quotes above so I will try to make a version of it.
I’m going based on memory instead of looking up sources, I’m pretty sure I’m wrong about the exact details of the claims below but I believe they’re approximately true.
The Mag 7 have a P/E of 32. Historically, when companies had a P/E of 32, their average future returns were much worse than average (my guess would be 0–3%).
A study looking at the performance of the #1 market cap company found that the top company almost always went on to underperform, which is an argument against buying Nvidia in particular.
Nvidia as a % of the total world market cap is currently the largest any company has ever been in history. When things go outside the normal historical range, that generally suggests the price is unsustainable.
Historically, the market has systematically over-extrapolated earnings/revenue growth. Companies with excellent earnings growth for years 1–3 tend to have merely above-average earnings growth for years 4–6, but they’re usually priced as if they’re going to continue to have excellent earnings growth. Although that’s just an average, and companies with very high market expectations still exceed expectations something like 40% of the time.
Stocks and industries tend to exhibit 3–5 year mean reversion, i.e. stocks that perform particularly well for 3–5 years on average underperform the market over the following year.
(These are five different perspectives on the same general market phenomenon, so they’re not really five independent pieces of evidence.)
On the outside view, I think there’s pretty good reason to believe that AI stocks are overpriced. However, on the inside view, the market sort of still doesn’t seem like it appreciates how big a deal AGI could be. So on balance I’m pretty uncertain.