Already and this is this is the Daily This is the Daily OS.
Oh, now it makes sense. Good morning and welcome to the Daily OS. It's Friday, the twenty first of November. I'm Sam Kazlowski.
I'm Zara Seidler.
This week, a technology stocks have been making headlines for all the wrong reasons. Major tech companies like Navidia and Meta have seen their share prices drop significantly, with some analysts warning that we might be witnessing the beginning of a tech and AI bubble bursting. On today's podcast, we're going to break down what this actually means, how we got here, and whether this does look like the infamous dot com crash from the year two thousand.
All right, Sam, First things first, I do want to get onto bubbles. Bubbles feel like an important and important thing to get through. But I think a good starting point is to understand what's happening with tech stocks, because this is all related. Right.
Yeah, So November has been the worst month for tech stocks in definitely a year.
Sorry to all listeners who have tech stocks, which is.
As we'll discuss pretty much every Australian and I'll get to that in a bit. But the Nasdaq which is a stock market index that tracks America's largest companies, and most of those largest companies now are tech companies. It fell about three percent over the past week. And that's billions and billions of dollars.
It's funny because three percent sounds so minor's serious.
It is, but some of the world's biggest tech companies have actually seen sharper drops than that. So Navidia, the company that makes the computer chips that power AI, it dropped around ten percent during November. It's now bounced back. Will also put a pin in that and come back to it later. Meta, which owns Facebook and Instagram, has
fallen by almost twenty percent in the past month. And so this group of companies that Wall Street calls the magnificence, so it's Apple, Microsoft, Google, Amazon, Navidio, Meta, and Tesla. That's kind of the seven powerful tech companies on the planet. As a group, they've dropped around an average of five percent this month.
Okay, I really want to understand why that drop has happened. But you started this by talking about a bubble, So really quickly, what do you mean when you're talking about a bubble? And then secondary to that, take me through why this is actually happening.
So I think they should have called it a balloon, not a bubble, and I know that the terminology police, So I like to think about it like an actual balloon which is being inflated beyond its safe capacity. And a market bubble occurs when stock prices rise so much and so quickly and so far above what these companies are actually worth that something pops it and once it pops, there's a very loud bang and everything comes crashing down.
And the whole idea behind a bubble is that the prices that we're seeing on the stock market, they're not being driven by rationality or by kind of calculations that make sense. Instead, it's being driven by enthusiasm by fomo and this kind of belief almost that these prices are just going to keep rising forever. And so the classic example that everyone uses is the dot com bubble from the late nineties.
Ye.
So that was when internet companies saw their stock prices go absolutely nuts, purely based on excitement that there was this world wide web and we're going to make a lot of money from the Internet, even though most of these companies weren't actually making any profit. And when that bubble burst in about March two thousand the Nasdaq, which I talked about before it fell seventy seven percent.
Wow.
Yeah, then your next question was about why, right.
Yeah, sorry to do the double prompt, but I guess so you've said, bubble balloon, whatever we want to call it. The theory behind that is that something can get too big and it can just burst pop yep pop. Is that what's happening here?
Yeah, Well, it hasn't happened yet, but the fear, especially this week, is that we are about to see that happen. Okay, And there's a couple of key reasons why people are starting to argue that. And the first is about money, just the sheer amount of money that's being put into
these companies. So tech companies have been spending unbelievable amounts of money building the infrastructure that they think they need to make a lot of money from AI for the next ten, twenty thirty years, and we're talking about you know,
specialized computer chips, massive data centers. In twenty twenty five alone, the world's largest tech companies are expected to spend about three to four hundred billion US dollars on infrastructure and the problem is is that when they're spending all of that money, we don't actually know for sure whether AI is going to generate enough long term revenue and profits for these companies to make all of that back.
And they're investing now in the hopes that the returns are far greater whenever that's realized down the track.
Exactly. They're placing a huge bet. And one analyst that I was reading said tech companies have to spend to keep up with massive demand and to get out in front of the pack, but that demand hasn't yet translated fully into longer term profits.
So interesting.
Yeah, And another concern is that the companies are finding it a long time to actually make that money back. So let's say that it.
Costs work in media, Well, that takes extra long.
But you know, they were expecting it to take one to two years to make money back from an individual user, say with a Chat GBT subscription or a claud subscription. They're now kind of saying it's going to take two to four years to see a return on that investment. And you know, that is a longer business model to have to support, which is why people are getting a little bit wobbly.
Okay, so you're saying there are some business models that are I guess resting on some hypotheticals that haven't necessarily been realized. And then there's this on the other hand, huge volumes of cash being spent in the hopes that it does get realized, especially when it comes to AI. Have investors basically decided that these companies then aren't worth as much as they thought they were even a few months ago.
Is that why we're seeing the decline exactly? And this is not investors saying these companies are going to fail and aren't worth anything. Yeah, it's just saying they're not worth as much as we see the hype of what we're saying it's going to be right now.
I was like fairly fresh to the world of like valuing companies when we started our company, and I was shocked by how much of the economy rests on hype. Yeah, and that you know, when you're looking from the outside in, you can think that they're as you were saying, is this mathematical equation or rationality? But really so much if it comes down to hype and all the hype has been around AI, there's nothing else that anyone has been talking about, like AI and Ozempic. I'd say, the two
things that people have been speaking about. And now are we saying perhaps the hype was unfounded?
Well, yeah, definitely cooler. There's a cooler pretre on this hype. But I do have to kind of defend the hype people though, somewhat of which you are one too. Well. I think it needs a bit of balance always this discussion, because it's very hard to predict something that doesn't exist yet, but that's innovation, and so it's very hard to be able to say with confidence, this is what we think we're worth, so therefore we're going to sell the shares
at this rate. And the other thing to remember is that if you look at the calculations of how much these companies are worth based on how much they're making, it was way more hyped before the two thousand dot com bubble burst. So there's you remember, like it was yesterday, it was great. I was four and a half years old, so that you know, there's an example of Cisco that was a company that took a huge hit in the dot com bubble. There's a thing in finance called a
pe ratio. It's basically kind of how much a share is going to cost you based on how much a company is making. It's a score. They had a PE ratio before the bubble burst in two thousand of one hundred and forty eight. Navidio's current PE twenty six. So it is another scale what we saw in the early two thousands, but it is it is getting dangerously high.
We'll be back with the rest of today's deep dive after a short note from today's sponsor. Okay, so there is I guess an example of this happening previously, but you've just said it was another scale. I want to turn out to something else that I've been reading about, and it's something about a circular investment in the AI industry.
I find that so interesting. So circular investment happens when tech companies invest in each other's companies, and one example would be the last month, Navidia and Microsoft said that they would invest fifteen billion dollars in a company called Anthropic, which makes another popular AI product called Claude. At the same time, Anthropic committed to purchasing thirty billion dollars worth of computing infrastructure like chips and servers and stuff from
Microsoft that runs on n video systems. So everybody is kind of by things off each other and then investing in each other's companies. And that is, according to critics, similar to the dot com bubble, where everyone's kind of interconnected. So you might have why is that a problem, Well, it's a problem because if one domino falls over, then they all kind of do. And also it could be a problem in the fact that you might hear a headline saying that company X has raised, however, many hundreds
of billions. But maybe that's not real money. It's kind of just if you help us out with some chips, will help you out with some computing power over there. It's kind of in kind transactions and it's not actually about the real cash. But yeah, the domino kind of effect of a circular investment situation can be quite quick. If one goes down, the rest go down.
I was having a conversation with somebody about the fact that there are a few people who the world, it seems, trusts that when they found the alarm, everybody's like, yep, something is wrong here. That's happened.
It has happened, and you'll know, Michael Berry, he's.
The invat I didn't know his name, but we know.
He's the investor who was kind of made very notable for our generation in The Big Short. He was the movie. He was the investor who basically said, I think the housing market is about to collapse, and he shorted the housing market. He recently disclosed, I think it was about a week and a half ago, that his fund had purchased a billion US dollars in bets against Navidia, So taking a short against Navidia. Essentially, he's betting that Navidia
stock price is going to fall dramatically. Then there's Peter Tiel, who's another billionaire tech investor. He sold his entire Navidia stake this week that was worth about one hundred million US dollars. Crazy crazy.
It's crazy also that the patterns of an individual can influence so much. So we've got massive spending, high prices, circular investment, all things that I've just learned about, and big investors betting against tech stocks. What are the companies themselves saying.
They're saying there's not to worry about it. They're saying everything's okay, and some of them do have a point. I mean, they're saying it's completely different. From the dot com bubble, the whole pe ratio thing that I said before. They're relying on that a lot, but they are some of them are profitable, and in the late nineties, almost
no internet companies that went bust were profitable. So yesterday Navidia revealed to the market that its profits in the past three months have gone up sixty five percent from this time last year. In the last three months, they've made thirty two billion US dollars in profit, So they have banked thirty two billion in profit, and that is
just one quarter. Navidia's stock price did jump on that news, unsurprisingly, went up three percent, and that's why I said at the beginning it had a rough couple of weeks, but it seems to be on the recovery now. The other point that AI companies make is that we all genuinely are using AI more than we did a year ago, and there is genuine demand. They're not making this up. They are showing that every business almost on the planet, and every school and every you know, every network is
using AI. So they have a demand that they think they can meet. And so you know, they're saying that data centers are running at about eighty percent capacity, and if they get higher than that, then it's dangerous that they'll kind of cap out. So that's why they need to build more data centers. It's not like expensive, yeah, but it's not like no one's using this, and so they're just building more and more for the.
Sake of it. Okay, So started the podcast by hypothesizing about whether or not there is a bubble or balloon, whatever we want to.
Call it, is there. Well, if I knew that answer, I would also have the I would have the big short too done about me, And that is I think a really important point to remember that no one knows. And you hear a lot of Yeah, you hear a lot about the ones who get a pick right and they get made into a movie with Christian Bale that playing them as a character. But there are a lot who don't get it right. And Michael Berry even for example,
has gotten stuff wrong as well. What I think is happening, though, is what analysts are calling a potentially healthy cool off, and so.
Like correcting itself.
Yeah, think about it like a big chill pill for the market. I like to think about it like it's a really fast car on a highway. And if you spin out at one hundred and fifty kilometers an hour, you can totally lose control. But if you spin out at sixty kilometers an hour, you can kind of recorrect yourself. That's almost what investors are trying to do now, is let's just take the temperature down and calm things down. But people are losing a lot of money in that process.
Yeah. Well, I mean I think that's a good point to end on, because I think that it is always nice to bring something back to our listeners and try and make sense of it for them. So can you just, I guess, finish on what it means for somebody, whether or not they are investors in the share market.
Well, I think if you have a super fund, you are invested in the share market. You just might not at least at our agent might not realize that investment for another couple of decades. But most super funds, if not all of them, would have some sort of exposure or buy into the companies that we've talked about today.
And when you talk about a company like Navidia, its value is eight percent of the S and P five hundred, which is the index that lists every one of the five hundred companies in America and most Australian super funds have S and P five hundred kind of exposure, and that hopefully over time will be a really good thing as the economy grows. But it is important that we're all shareholders at some level, mainly through our super if
we don't have shares directly. The only other thing I wanted to say before we kind of panic that things are about to burst is that, yeah, there was a big decline in the last month, but if you look at the last year, things are already a lot better than they were this time last year. So you know, you can picture the big graph in your head and there's been a then you try and solid so over the long term, the kind of long term investing philosophy
still kind of stands true. But I think the really important bit here is around AI companies, for really the first time, having to justify properly the value that they have to shareholders.
There you go, so interesting, Sam. Thank you for taking us through that, really appreciate it, and thank you for joining us for another episode of the Daily Oz. We will be back as usual with the headlines this evening, but until then, have a great day.
My name is Lily Maddon and I'm a proud Arunda Bungelung Caalcuttin woman from Gadigol Country. The Daily oz acknowledges that this podcast is recorded on the lands of the Gadighl people and pays respect to all Aboriginal and Torres s right island and nations.
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