The Reality of AI Investing: My Thoughts on Nvidia
I recently had a chat about something that's been on my mind a lot lately—the future of AI and investing. It's exciting to see all the progress in AI, but sometimes I think we forget that all these advancements come at a cost. Companies like Nvidia, which is now one of the most valuable in the US, are leading the charge in designing chips for AI.
But let's not forget, someone has to pay for all this innovation.
The Current Frenzy (and Sustainability)
Right now, there's a land grab happening in the AI world. Everyone wants to be a leader in large language models and generative AI. The thinking is, if you don't invest heavily now, you'll miss out on being one of the big winners in the future. It's like a gold rush, with companies spending as much as they can to secure their place at the top.
But here's the thing: this level of spending growth isn't sustainable. Eventually, companies will need solid business models to support the level of spending growth anticipated by investors. As the competition heats up, there will be fewer players in the game. Just like in any industry, there will be winners and losers.
The Evolution of Hardware and Importance of Data
Another factor to consider is the evolution of hardware. While Nvidia may be dominating the market right now, there's no guarantee they'll stay on top. As AI technology advances, the hardware needs will change. Industries with huge promise attract substantial competition and being first doesn’t guarantee success (see Six Degrees, WorldWideWeb, Magnavox Odyssey). You may not have heard of those but they were the first social media, web browser and gaming console. It took decades to sort out the winners. And AI in particular isn’t new. The field began in the 1950’s and has experienced long “AI Winters” where progress stalled. We may hit another wall at some point. That much is unclear, making accurate financial projections impossible. However, winners in AI will need to build durable competitive advantages in order to secure their seat at the top.
One key aspect of AI success is the quality of the data used to train the models.
It's a simple concept: garbage in, garbage out.
Companies with unique and valuable datasets will have a competitive edge. Training AI on reliable data is crucial for producing accurate and reliable results. Models trained on commodity data available to everyone on the web will be, in my opinion, commoditized and could face legal issues such as the copyright lawsuit against OpenAI by the New York Times.
My Take
In my opinion, many companies in the AI space are being valued unrealistically. Success in AI investing will require more than just technological advancements. It will also require business models with sustainable competitive advantages, access to quality (and ideally unique) data, as well as the ability to adapt to changing hardware landscapes.
As we look to the future of investing in AI-related companies, it's clear that there are both opportunities and challenges ahead. While the potential for growth and innovation is immense, success will depend on more than just technological prowess. It will require a strategic approach, a keen understanding of the market, and the ability to adapt to change. Today’s winners could turn to losers and there are likely many beneficiaries that are currently overlooked or not yet born.
Austin Crites is the Chief Investment Officer of Aurora Asset Management, an Indianapolis-based subsidiary of Aurora Financial Strategies which is located in Kokomo, IN. He can be reached via email at austin@auroramgt.com. Investment Advisory Services are offered through BCGM Wealth Management, LLC, a SEC registered investment adviser. This blog does not constitute advice. This is not an offer to buy or sell securities. Advisor is not licensed in all states. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. BCGM Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Clients may own positions in the securities discussed. SEC registration does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability.
