AI is the New Dot-com
Overview
A few AI-related stocks have driven the bulk of market returns in 2023
The valuations for the NASDAQ (QQQ) ETF appear unsustainably high
Don’t forget to ask “How much?”
Back in My Day
Talk of artificial intelligence has taken the world by storm in 2023. Students started using ChatGPT for homework while many working-age adults fret whether the bots are coming for their jobs. I remember when the internet was new and exciting. I was told there would be no more stores because we would buy everything online. I now buy my groceries online via Kroger and try to do my holiday shopping online so I can avoid the crowds. Wait, I thought there would be no crowds because there would be no stores. According to Statista, just over 15% of retail sales in the US during the first quarter of 2023 were done on the interwebs.
Mac from It’s Always Sunny (the best show on tv according to me) may have been wrong about his prediction for the internet, but his advice would have paid off for investors. Those that piled into internet stocks in the late 90s were mostly left disappointed. From the start of 2000 until the end of 2013 investors in the NASDAQ (QQQ), a technology-heavy index, made a return of 3.07% (was positive due to a small amount of dividends). It took 14 years to make roughly 3% assuming you held onto your shares for the eventual recovery.
Source: FactSet
A New Idol
Today’s investors are not enthralled with “dot com” companies. They have embraced a new idol called AI. The chart below illustrates how the market returns year to date have been mostly driven by a handful of large companies that operate in the space. Artificial intelligence will surely have an impact on our economy and way of life, but will their be a return for investors 10 years from now? I suspect this will play out similar to the internet boom of yesteryear.
Source: FactSet
In addition to It’s Always Sunny, I’m also a fan of Ben Graham. He’s called the father of value investing and served as the teacher and mentor to some famous investor named Warren Buffet. One of my favorite quotes from Graham’s The Intelligent Investor is “The really dreadful losses always occur after the buyer forgot to ask ‘How much?’” The chart below shows the P/E ratio that the (QQQ) is trading at. Today, it trades for over 33 times trailing earnings per share which is similar to where it traded during the internet bubble. It’s also similar to the valuation it traded at the end of 2021. In case you forgot, lost over 32% of its value in 2022. This is not a prediction of immediate doom. Valuation is not a timing tool. However, history suggests the party for AI investors won’t last forever.
Investors forgot to ask “how much” during the internet bubble and in 2021. I fear they have forgotten once again.
For further reading, our views and the equity market environment are similar to early 2022 when I wrote this article.
In Summary
At Aurora, we are constantly looking for attractive investment opportunities for our clients. We look for businesses with economic moats, quality balance sheets and attractive upside potential. This blog represents our thinking at the time of publication. If you are a DIY investor, use this only as a starting point for your research and be sure to do your own due diligence. For questions regarding our asset allocation and individual stock strategies, please reach out to us!
Invest Curiously,
Austin Crites, CFA
Austin Crites is the Chief Investment Officer of Aurora Financial Strategies, a financial advisory firm based out of 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. Registration does not imply a certain level of skill or training. 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.
