Last week, the CEOs and chief scientists from companies including Google DeepMind and Open AI warned that the threat to humanity from this fast-developing technology rivals that of nuclear conflict and disease. San Franciso-based Center for AI Safety declared that “mitigating the risk of extinction from AI should be a global priority alongside other societal-scale risks such as pandemics and nuclear war. Visions of Arnold Schwarzenegger growling “I’ll be back” comes to mind.
Perhaps, it was this warning that saw Nvidia, which had been a scorching tear, briefly cross US$400 ($540.23) on May 30 (and with it, gain a market cap of more than US$1 trillion) before pulling back 5%.
After all, lifted by the hype of all things AI and upbeat guidance, Nvidia was trading at just US$300 a week earlier.
The few stock investors this year riding the narrow rally among a few tech stocks piled into the incredible future portended by consumer AI applications and the chips that will fuel it. After all, they must have figured, if AI does not lead to Armageddon for the human race, buying into Nvidia — at over 200 times PE and 40 times sales — is cheap.
We have seen movies with a similar plot too often before: From dainty tulips hawked by the Dutch to one another to the earth-ending plague that Y2K bugs would supposedly bring or more recently, how the world will be changed with electric vehicles and cryptocurrencies. For investors joining the party at the same time while learning how to use ChatGPT, you have been warned.
Back to the Future
At a fireside chat moderated by a partner from EY whom I have known since my university days, the 220-strong EY Financial Services group asked many good questions that got me thinking on my feet (or rather my seat). A few of them touched on the topic of skills and technology, including the common thread linking AI and Armageddon. One good question was also “whether there was anything I wished I had known earlier on in life”.
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My spontaneous response may have been disappointing. I grounded the sexy topics of DeFi (decentralised finance), tokenisation and blockchain in wealth management as merely part of the continuum of the evolution of financial market technology, whose main aim from their respective promoters (should regulators permit) was to make it easier for investors to access assets and for issuers to distribute to as long a tail of investors as possible.
After all, that was the big bang in the 90s when computerisation led to dematerialisation and electronic records — and the end of paper stock and bond scrips which I collect today. Technology in itself and the machines that drive it are agnostic to how humans use and apply them. They could be used for nefarious reasons that underpinned many of the ICOs (initial coin offering) in the 2018–2020 period, or indeed many altcoins in crypto today, and some very bored apes in the metaverse swapped for pornography, drugs and even facilitating North Koreans and Russian money, allegedly.
They could be for good to democratise access to better quality and cheaper investment products to a wider pool of investors enabling easy diversification, as some platforms like Sygnum and ADDX (where I am on the board) are developing in Singapore. The challenge in the democratised world of finance, much like the free market for information, is that even if it is self-correcting (people learn from their mistakes), they could have lost both their shirts and pants from scams and false prophets long before.
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The market failure resulting from a free press that one assumes is self-correcting is the extreme positions carried by the mouthpieces of the wealthy, including Rupert Murdoch’s Fox Media. Without regulations and controls on social media — even if it is the barebones community standards of Meta versus the intrusive Chinese surveillance of WeChat and Weibo, the Twitter platform can be used for hate speech and not just free speech. We can choose to surround ourselves in our own echo chambers and be more hardline in our beliefs that the world is flat, Trump had the US election stolen, and galvanise community, race and religion against each other.
AI may indeed help us along the way to self-destruction, especially if the algorithms in Facebook and TikTok reinforce by helping us self-select. Or it can be used as a force for good. The chatbots for banks and other consumer companies are getting better (but a long way from perfect), even if I still prefer to talk to a human being. Machine-learning applications can help sieve through a lot of data making improving healthcare diagnosis, security monitoring or simply boring stuff that most of us don’t want jobs in.
My inputs to the discussion were to “embrace technology”. Learn it. Learn what can be done with it so you know how and what you are competing with. And do not fear it. By keeping a learning mindset we can use technology and features that make life more comfortable for us in the first world, and also see it for itself. Apply critical thinking and not just believe the hype that often comes with the promoters of new tech or purveyors of investment opportunities along with it. Industries or companies which embrace it create new markets and value. The question is how do we separate the wheat from the chaff?
Total Recall
Oddly, I find my views on Nvidia’s overinflated price in sync with Cathie Wood’s. Having called a lot of the Ark Innovation bets fluff in this column for almost two years now, it was a tad disconcerting to hear her on June 1 defend her firm’s decision to exit Nvidia between November 2022 and January this year well below US$200, less than half its current value. Apart from its flagship Ark Innovation ETF which made its exit in January, the smaller Autonomous Technology and Robotics ETF sold residual shares on May 31, given how Wood sees Nvidia’s shares being “priced ahead of the curve”.
In her view, Tesla at six times its revenue “is the most obvious beneficiary of the recent breakthroughs in #AI”. In this, I also have to agree that on a relative value basis, Nvidia at 40 times versus Tesla at six times makes it look cheap by this one measure. If only Tesla actually made more actual earnings and had a different CEO who focused his primary energies on his company, I may be more convinced. In this instance, she may be temporarily right though. Tesla has had a better year, especially after Musk hired a professional to run Twitter — in the ostensible hope that he will be less distracted. After all, the Space X launch crash a month ago was not reassuring for Tesla shareholders. Still, Wood “sees dozens of AI winners”, including automation software company UiPath, which Ark Funds continue to buy.
For those who follow visionary investing in tech, in the long run, out of these cycles will emerge champions like Alphabet from the dotcom era more than making up for all the other growth stocks that fizzled out. The question is which ones will win, and how many will fall out.
Interstellar
US tech investors are having a better run this year with a few of the top tech stocks up close to 50% year to date, lifting indices like the Nasdaq and the S&P up even if there is broad market weakness and investment banks moan the lack of risk appetite to close new IPO or M&A deals. The AI story and recent mania over consumer applications (which had always been there) but were triggered by the Chat GPT phenomenon saw all the tech companies East and West rushing to come out to state that they too had highly sophisticated developments.
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Like blockchain, which is a useful technology, tech is tech and not intrinsically valuable as a moat to defend against competition. What then is to explain the record results on Wall Street even whilst they are cutting jobs and taking out inflated costs from 2021’s bubble? The Wall Street Journal recently highlighted that “more companies are beating analysts’ expectations and by bigger amounts” using non-traditional earnings metrics. This includes reallocating costs, unwinding charges and delaying depreciation! Alphabet’s first-quarter earnings beat is partly because it shifted depreciation expense by nearly US$1 billion, pushing EPS above expectations.
As investors cheered Google before looking at its numbers, I wonder if they sold off the stocks of suppliers of computer servers — since they should now last longer than expected before replacement. According to WSJ, “a measure of the likelihood of earnings manipulation is at its highest level in 40 years’’. When CFOs stretch numbers, it is often correlated with a slowing business environment.
My caution with US tech corresponds with the rebound this year that has carried this year’s leaders (last year’s worst performers) to about two-thirds of 2021’s highs. Technically, this is known as a Fibonacci level. That the debt ceiling is finally out of the way at the 13th hour after the June 1 original deadline is reassuring, however, the weak broader market is signalling all is not well. The economy will weigh in the next half year. This AI rally and Nvidia’s surge may be the meme stock moment of 2023.
The Matrix
With or without AI, the world faces a few Armageddon threats. True the Russians, though have threatened so, have not actually used tactical nukes on the Ukrainian battlefields yet. Also, the fact that China’s defence minister Li Shangfu does not want to “formally” meet the Americans is disconcerting. Only in Singapore at the Shangri La-Dialogue over the weekend could Lloyd Austin face his Chinese counterpart at a group meal bridged by Singapore’s defence minister and conference host Ng Eng Hen. That said, there are positive signs of a thaw even if temporary on the business front. Elon Musk did a few wefies on a trip to China recently. This was followed by Jamie Dimon of JP Morgan Chase who made a cheeky stop in Taiwan on the way back.
Perhaps the better way for us investors is to play the AI game through the tried and tested: Well-run companies in traditional industries that we understand; CFOs that do not stretch the accounting imagination; companies that have gone through Covid-induced restructuring and reimagination of their business models, maybe with a disposal or an M&A to boot. With clever implementation of AI, they too can extract cost savings not merely by replacing manpower. Employees “displaced” can be redeployed to work of higher value. AI applications such as digital twins for energy plants, transportation models and data centres can replicate, simulate, and reduce production downtime and maintenance; or optimise carbon footprint, manufacturing, ship and rig-building, and even shopping mall traffic.
In my column “The phoenix rises but first, there must be ashes” (Issue 1079, week of March 27), I talked about Sembcorp Industries which had by that time been a Covid five-bagger stock return in two years in the “boring” Singapore market. As its transformation continued, it has since added 30% to $5.20 making it a 7.5 times standout performer among the blue chips on The Straits Times Index. Is there more to come from laggards like ComfortDelGro or SATs, even while SIA has taken off post-pandemic? Or are we a tad too harsh on our own tech companies here. With Venture Corp taking a breather post its (still) profitable results recently and AEM Holdings chipping away on a gradual rebound, perhaps their machines have a role to play like pickaxes in a future AI gold rush and so will their stocks.
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
