Speaker 1: Already and this is this is the Daily This is
Speaker 1: the Daily OS.
Speaker 2: Oh, now it makes sense. Good morning and welcome to
Speaker 2: the Daily OS. It's Friday, the twenty first of November.
Speaker 2: I'm Sam Kazlowski.
Speaker 1: I'm Zara Seidler.
Speaker 2: This week, a technology stocks have been making headlines for
Speaker 2: all the wrong reasons. Major tech companies like Navidia and
Speaker 2: Meta have seen their share prices drop significantly, with some
Speaker 2: analysts warning that we might be witnessing the beginning of
Speaker 2: a tech and AI bubble bursting. On today's podcast, we're
Speaker 2: going to break down what this actually means, how we
Speaker 2: got here, and whether this does look like the infamous
Speaker 2: dot com crash from the year two thousand.
Speaker 1: All right, Sam, First things first, I do want to
Speaker 1: get onto bubbles. Bubbles feel like an important and important
Speaker 1: thing to get through. But I think a good starting
Speaker 1: point is to understand what's happening with tech stocks, because
Speaker 1: this is all related. Right.
Speaker 2: Yeah, So November has been the worst month for tech
Speaker 2: stocks in definitely a year.
Speaker 1: Sorry to all listeners who have tech stocks, which is.
Speaker 2: As we'll discuss pretty much every Australian and I'll get
Speaker 2: to that in a bit. But the Nasdaq which is
Speaker 2: a stock market index that tracks America's largest companies, and
Speaker 2: most of those largest companies now are tech companies. It
Speaker 2: fell about three percent over the past week. And that's
Speaker 2: billions and billions of dollars.
Speaker 1: It's funny because three percent sounds so minor's serious.
Speaker 2: It is, but some of the world's biggest tech companies
Speaker 2: have actually seen sharper drops than that. So Navidia, the
Speaker 2: company that makes the computer chips that power AI, it
Speaker 2: dropped around ten percent during November. It's now bounced back.
Speaker 2: Will also put a pin in that and come back
Speaker 2: to it later. Meta, which owns Facebook and Instagram, has
Speaker 2: fallen by almost twenty percent in the past month. And
Speaker 2: so this group of companies that Wall Street calls the magnificence,
Speaker 2: so it's Apple, Microsoft, Google, Amazon, Navidio, Meta, and Tesla.
Speaker 2: That's kind of the seven powerful tech companies on the planet.
Speaker 2: As a group, they've dropped around an average of five
Speaker 2: percent this month.
Speaker 1: Okay, I really want to understand why that drop has happened.
Speaker 1: But you started this by talking about a bubble, So
Speaker 1: really quickly, what do you mean when you're talking about
Speaker 1: a bubble? And then secondary to that, take me through
Speaker 1: why this is actually happening.
Speaker 2: So I think they should have called it a balloon,
Speaker 2: not a bubble, and I know that the terminology police,
Speaker 2: So I like to think about it like an actual
Speaker 2: balloon which is being inflated beyond its safe capacity. And
Speaker 2: a market bubble occurs when stock prices rise so much
Speaker 2: and so quickly and so far above what these companies
Speaker 2: are actually worth that something pops it and once it pops,
Speaker 2: there's a very loud bang and everything comes crashing down.
Speaker 2: And the whole idea behind a bubble is that the
Speaker 2: prices that we're seeing on the stock market, they're not
Speaker 2: being driven by rationality or by kind of calculations that
Speaker 2: make sense. Instead, it's being driven by enthusiasm by fomo
Speaker 2: and this kind of belief almost that these prices are
Speaker 2: just going to keep rising forever. And so the classic
Speaker 2: example that everyone uses is the dot com bubble from
Speaker 2: the late nineties.
Speaker 1: Ye.
Speaker 2: So that was when internet companies saw their stock prices
Speaker 2: go absolutely nuts, purely based on excitement that there was
Speaker 2: this world wide web and we're going to make a
Speaker 2: lot of money from the Internet, even though most of
Speaker 2: these companies weren't actually making any profit. And when that
Speaker 2: bubble burst in about March two thousand the Nasdaq, which
Speaker 2: I talked about before it fell seventy seven percent.
Speaker 1: Wow.
Speaker 2: Yeah, then your next question was about why, right.
Speaker 1: Yeah, sorry to do the double prompt, but I guess
Speaker 1: so you've said, bubble balloon, whatever we want to call it.
Speaker 1: The theory behind that is that something can get too
Speaker 1: big and it can just burst pop yep pop. Is
Speaker 1: that what's happening here?
Speaker 2: Yeah, Well, it hasn't happened yet, but the fear, especially
Speaker 2: this week, is that we are about to see that happen. Okay,
Speaker 2: And there's a couple of key reasons why people are
Speaker 2: starting to argue that. And the first is about money,
Speaker 2: just the sheer amount of money that's being put into
Speaker 2: these companies. So tech companies have been spending unbelievable amounts
Speaker 2: of money building the infrastructure that they think they need
Speaker 2: to make a lot of money from AI for the
Speaker 2: next ten, twenty thirty years, and we're talking about you know,
Speaker 2: specialized computer chips, massive data centers. In twenty twenty five alone,
Speaker 2: the world's largest tech companies are expected to spend about
Speaker 2: three to four hundred billion US dollars on infrastructure and
Speaker 2: the problem is is that when they're spending all of
Speaker 2: that money, we don't actually know for sure whether AI
Speaker 2: is going to generate enough long term revenue and profits
Speaker 2: for these companies to make all of that back.
Speaker 1: And they're investing now in the hopes that the returns
Speaker 1: are far greater whenever that's realized down the track.
Speaker 2: Exactly. They're placing a huge bet. And one analyst that
Speaker 2: I was reading said tech companies have to spend to
Speaker 2: keep up with massive demand and to get out in
Speaker 2: front of the pack, but that demand hasn't yet translated
Speaker 2: fully into longer term profits.
Speaker 1: So interesting.
Speaker 2: Yeah, And another concern is that the companies are finding
Speaker 2: it a long time to actually make that money back.
Speaker 2: So let's say that it.
Speaker 1: Costs work in media, Well, that takes extra long.
Speaker 2: But you know, they were expecting it to take one
Speaker 2: to two years to make money back from an individual user,
Speaker 2: say with a Chat GBT subscription or a claud subscription.
Speaker 2: They're now kind of saying it's going to take two
Speaker 2: to four years to see a return on that investment.
Speaker 2: And you know, that is a longer business model to
Speaker 2: have to support, which is why people are getting a
Speaker 2: little bit wobbly.
Speaker 1: Okay, so you're saying there are some business models that
Speaker 1: are I guess resting on some hypotheticals that haven't necessarily
Speaker 1: been realized. And then there's this on the other hand,
Speaker 1: huge volumes of cash being spent in the hopes that
Speaker 1: it does get realized, especially when it comes to AI.
Speaker 1: Have investors basically decided that these companies then aren't worth
Speaker 1: as much as they thought they were even a few
Speaker 1: months ago.
Speaker 2: Is that why we're seeing the decline exactly? And this
Speaker 2: is not investors saying these companies are going to fail
Speaker 2: and aren't worth anything. Yeah, it's just saying they're not
Speaker 2: worth as much as we see the hype of what
Speaker 2: we're saying it's going to be right now.
Speaker 1: I was like fairly fresh to the world of like
Speaker 1: valuing companies when we started our company, and I was
Speaker 1: shocked by how much of the economy rests on hype. Yeah,
Speaker 1: and that you know, when you're looking from the outside in,
Speaker 1: you can think that they're as you were saying, is
Speaker 1: this mathematical equation or rationality? But really so much if
Speaker 1: it comes down to hype and all the hype has
Speaker 1: been around AI, there's nothing else that anyone has been
Speaker 1: talking about, like AI and Ozempic. I'd say, the two
Speaker 1: things that people have been speaking about. And now are
Speaker 1: we saying perhaps the hype was unfounded?
Speaker 2: Well, yeah, definitely cooler. There's a cooler pretre on this hype.
Speaker 2: But I do have to kind of defend the hype
Speaker 2: people though, somewhat of which you are one too. Well.
Speaker 2: I think it needs a bit of balance always this discussion,
Speaker 2: because it's very hard to predict something that doesn't exist yet,
Speaker 2: but that's innovation, and so it's very hard to be
Speaker 2: able to say with confidence, this is what we think
Speaker 2: we're worth, so therefore we're going to sell the shares
Speaker 2: at this rate. And the other thing to remember is
Speaker 2: that if you look at the calculations of how much
Speaker 2: these companies are worth based on how much they're making,
Speaker 2: it was way more hyped before the two thousand dot
Speaker 2: com bubble burst. So there's you remember, like it was yesterday,
Speaker 2: it was great. I was four and a half years old,
Speaker 2: so that you know, there's an example of Cisco that
Speaker 2: was a company that took a huge hit in the
Speaker 2: dot com bubble. There's a thing in finance called a
Speaker 2: pe ratio. It's basically kind of how much a share
Speaker 2: is going to cost you based on how much a
Speaker 2: company is making. It's a score. They had a PE
Speaker 2: ratio before the bubble burst in two thousand of one
Speaker 2: hundred and forty eight. Navidio's current PE twenty six. So
Speaker 2: it is another scale what we saw in the early
Speaker 2: two thousands, but it is it is getting dangerously high.
Speaker 1: We'll be back with the rest of today's deep dive
Speaker 1: after a short note from today's sponsor. Okay, so there
Speaker 1: is I guess an example of this happening previously, but
Speaker 1: you've just said it was another scale. I want to
Speaker 1: turn out to something else that I've been reading about,
Speaker 1: and it's something about a circular investment in the AI industry.
Speaker 2: I find that so interesting. So circular investment happens when
Speaker 2: tech companies invest in each other's companies, and one example
Speaker 2: would be the last month, Navidia and Microsoft said that
Speaker 2: they would invest fifteen billion dollars in a company called Anthropic,
Speaker 2: which makes another popular AI product called Claude. At the
Speaker 2: same time, Anthropic committed to purchasing thirty billion dollars worth
Speaker 2: of computing infrastructure like chips and servers and stuff from
Speaker 2: Microsoft that runs on n video systems. So everybody is
Speaker 2: kind of by things off each other and then investing
Speaker 2: in each other's companies. And that is, according to critics,
Speaker 2: similar to the dot com bubble, where everyone's kind of interconnected.
Speaker 2: So you might have why is that a problem, Well,
Speaker 2: it's a problem because if one domino falls over, then
Speaker 2: they all kind of do. And also it could be
Speaker 2: a problem in the fact that you might hear a
Speaker 2: headline saying that company X has raised, however, many hundreds
Speaker 2: of billions. But maybe that's not real money. It's kind
Speaker 2: of just if you help us out with some chips,
Speaker 2: will help you out with some computing power over there.
Speaker 2: It's kind of in kind transactions and it's not actually
Speaker 2: about the real cash. But yeah, the domino kind of
Speaker 2: effect of a circular investment situation can be quite quick.
Speaker 2: If one goes down, the rest go down.
Speaker 1: I was having a conversation with somebody about the fact
Speaker 1: that there are a few people who the world, it seems,
Speaker 1: trusts that when they found the alarm, everybody's like, yep,
Speaker 1: something is wrong here. That's happened.
Speaker 2: It has happened, and you'll know, Michael Berry, he's.
Speaker 1: The invat I didn't know his name, but we know.
Speaker 2: He's the investor who was kind of made very notable
Speaker 2: for our generation in The Big Short. He was the movie.
Speaker 2: He was the investor who basically said, I think the
Speaker 2: housing market is about to collapse, and he shorted the
Speaker 2: housing market. He recently disclosed, I think it was about
Speaker 2: a week and a half ago, that his fund had
Speaker 2: purchased a billion US dollars in bets against Navidia, So
Speaker 2: taking a short against Navidia. Essentially, he's betting that Navidia
Speaker 2: stock price is going to fall dramatically. Then there's Peter Tiel,
Speaker 2: who's another billionaire tech investor. He sold his entire Navidia
Speaker 2: stake this week that was worth about one hundred million
Speaker 2: US dollars. Crazy crazy.
Speaker 1: It's crazy also that the patterns of an individual can
Speaker 1: influence so much. So we've got massive spending, high prices,
Speaker 1: circular investment, all things that I've just learned about, and
Speaker 1: big investors betting against tech stocks. What are the companies
Speaker 1: themselves saying.
Speaker 2: They're saying there's not to worry about it. They're saying
Speaker 2: everything's okay, and some of them do have a point.
Speaker 2: I mean, they're saying it's completely different. From the dot
Speaker 2: com bubble, the whole pe ratio thing that I said before.
Speaker 2: They're relying on that a lot, but they are some
Speaker 2: of them are profitable, and in the late nineties, almost
Speaker 2: no internet companies that went bust were profitable. So yesterday
Speaker 2: Navidia revealed to the market that its profits in the
Speaker 2: past three months have gone up sixty five percent from
Speaker 2: this time last year. In the last three months, they've
Speaker 2: made thirty two billion US dollars in profit, So they
Speaker 2: have banked thirty two billion in profit, and that is
Speaker 2: just one quarter. Navidia's stock price did jump on that news, unsurprisingly,
Speaker 2: went up three percent, and that's why I said at
Speaker 2: the beginning it had a rough couple of weeks, but
Speaker 2: it seems to be on the recovery now. The other
Speaker 2: point that AI companies make is that we all genuinely
Speaker 2: are using AI more than we did a year ago,
Speaker 2: and there is genuine demand. They're not making this up.
Speaker 2: They are showing that every business almost on the planet,
Speaker 2: and every school and every you know, every network is
Speaker 2: using AI. So they have a demand that they think
Speaker 2: they can meet. And so you know, they're saying that
Speaker 2: data centers are running at about eighty percent capacity, and
Speaker 2: if they get higher than that, then it's dangerous that
Speaker 2: they'll kind of cap out. So that's why they need
Speaker 2: to build more data centers. It's not like expensive, yeah,
Speaker 2: but it's not like no one's using this, and so
Speaker 2: they're just building more and more for the.
Speaker 1: Sake of it. Okay, So started the podcast by hypothesizing
Speaker 1: about whether or not there is a bubble or balloon,
Speaker 1: whatever we want to.
Speaker 2: Call it, is there. Well, if I knew that answer,
Speaker 2: I would also have the I would have the big
Speaker 2: short too done about me, And that is I think
Speaker 2: a really important point to remember that no one knows.
Speaker 2: And you hear a lot of Yeah, you hear a
Speaker 2: lot about the ones who get a pick right and
Speaker 2: they get made into a movie with Christian Bale that
Speaker 2: playing them as a character. But there are a lot
Speaker 2: who don't get it right. And Michael Berry even for example,
Speaker 2: has gotten stuff wrong as well. What I think is happening, though,
Speaker 2: is what analysts are calling a potentially healthy cool off,
Speaker 2: and so.
Speaker 1: Like correcting itself.
Speaker 2: Yeah, think about it like a big chill pill for
Speaker 2: the market. I like to think about it like it's
Speaker 2: a really fast car on a highway. And if you
Speaker 2: spin out at one hundred and fifty kilometers an hour,
Speaker 2: you can totally lose control. But if you spin out
Speaker 2: at sixty kilometers an hour, you can kind of recorrect yourself.
Speaker 2: That's almost what investors are trying to do now, is
Speaker 2: let's just take the temperature down and calm things down.
Speaker 2: But people are losing a lot of money in that process.
Speaker 1: Yeah. Well, I mean I think that's a good point
Speaker 1: to end on, because I think that it is always
Speaker 1: nice to bring something back to our listeners and try
Speaker 1: and make sense of it for them. So can you just,
Speaker 1: I guess, finish on what it means for somebody, whether
Speaker 1: or not they are investors in the share market.
Speaker 2: Well, I think if you have a super fund, you
Speaker 2: are invested in the share market. You just might not
Speaker 2: at least at our agent might not realize that investment
Speaker 2: for another couple of decades. But most super funds, if
Speaker 2: not all of them, would have some sort of exposure
Speaker 2: or buy into the companies that we've talked about today.
Speaker 2: And when you talk about a company like Navidia, its
Speaker 2: value is eight percent of the S and P five hundred,
Speaker 2: which is the index that lists every one of the
Speaker 2: five hundred companies in America and most Australian super funds
Speaker 2: have S and P five hundred kind of exposure, and
Speaker 2: that hopefully over time will be a really good thing
Speaker 2: as the economy grows. But it is important that we're
Speaker 2: all shareholders at some level, mainly through our super if
Speaker 2: we don't have shares directly. The only other thing I
Speaker 2: wanted to say before we kind of panic that things
Speaker 2: are about to burst is that, yeah, there was a
Speaker 2: big decline in the last month, but if you look
Speaker 2: at the last year, things are already a lot better
Speaker 2: than they were this time last year. So you know,
Speaker 2: you can picture the big graph in your head and
Speaker 2: there's been a then you try and solid so over
Speaker 2: the long term, the kind of long term investing philosophy
Speaker 2: still kind of stands true. But I think the really
Speaker 2: important bit here is around AI companies, for really the
Speaker 2: first time, having to justify properly the value that they
Speaker 2: have to shareholders.
Speaker 1: There you go, so interesting, Sam. Thank you for taking
Speaker 1: us through that, really appreciate it, and thank you for
Speaker 1: joining us for another episode of the Daily Oz. We
Speaker 1: will be back as usual with the headlines this evening,
Speaker 1: but until then, have a great day.
Speaker 2: My name is Lily Maddon and I'm a proud Arunda
Speaker 2: Bungelung Caalcuttin woman from Gadigol Country. The Daily oz acknowledges
Speaker 2: that this podcast is recorded on the lands of the
Speaker 2: Gadighl people and pays respect to all Aboriginal and Torres
Speaker 2: s right island and nations.
Speaker 1: We pay our respects to the first peoples of these countries,
Speaker 1: both past and present.