Uncertainty can be your friend
Investing is something almost, but not quite, entirely unlike reading tea leaves. The Hitchhiker’s Guide to the Galaxy might not be about investing or tea leaves, but one suspects that Douglas Adams might have enjoyed the absurdity of predicting what financial markets might do. The person reading your tea leaves is really judging you when she tells your future. She is weighing you up, considering what you might amount to three, five, or ten years from now, and what might befall you. Investing is not quite entirely unlike this. Every investment decision is a judgement – about cost, value, future cash flows, and what the investment might amount to in three, five, or ten years’ time. The very best investments will grow over time and compound, meaning you can sell it for much more than you bought it. You may make these judgements on the back of a cigarette packet, or you may build a complicated computer model – however you make your judgement, you know that forecasting is difficult, especially when it is about the future. Unlike the practice of reading tea leaves, though, uncertainty is not always to be feared; in financial markets, you can harness it to earn a higher return.
One of the biggest judgements today is about the investment potential of AI. The huge upfront investment is making people nervous, but this is compounded by the uncertainty around future cash flows. Most agree that AI will boost productivity and growth, although we do not know how yet. Some commentators think that AI will be as important as the invention of the steam engine, the building of the railways, or the internal combustion engine.
The chart below from Ark Investments, one of the cheerleaders for AI, sees a huge growth spurt coming from the convergence of five major technological advances – AI, energy storage, robotics, cryptocurrency, and multi-omics technology in healthcare.
Source: Ark Investments
The investment needed to support AI alone is mind boggling. To help comparability and understanding companies now talk about how much power their datacentres will consume to operate. Datacentres are now being built today that consume a gigawatt of power, enough to power about 750,000 homes. A one gigawatt datacentre costs about £50 billion. Privately owned OpenAI, the company behind ChatGPT, has raised up to $1.5 trillion, according to the Financial Times, to build 26 gigawatts of computing capacity – this from a company that has revenues of just $12 billion, and is loss making. Meta Platforms, Alphabet, Amazon, and Microsoft all have plans to ramp up their capital expenditure in competition with OpenAI. The Financial Times chart below shows the expected increase in capex from the big four tech companies.
We are getting used to hearing about billions and trillions, so to give an impression of the scale of the projects there is a representation below of Meta’s new Louisiana datacentre superimposed on Manhattan which could use five gigawatts of power by 2030. There may be some hyperbole in the picture, but it does give an idea of the scale of the investment opportunity.
Source: Meta
While the judgement on the future benefit of AI is uncertain, the expense is relatively clear. What is an expense to OpenAI and others is opportunity and income potential to a different set of companies. The chief beneficiary so far has been Nvidia, which looks set to grow its revenues by 10x and its earnings 15x in the four years to the end of 2026. Many other companies are supplying the big tech companies with everything from software, hardware, electricity, power generators to earth moving equipment. Some believe that we are only in the second year of a 10-year datacentre construction boom, with the only judgement to be made on the scale of the opportunity.
It is very difficult to make a judgement about the future cash flows of all the investment in AI. This is where you need a good, strong cup of tea and lucky tea leaves. Who would have guessed if you had gone back to the start of the internet that social media would have sprung up as a substantial and highly profitable industry, that we get our news from our mobile phones, rendering print media obsolete, or that we would get our entertainment from streaming services. Similarly, the future cash flows from AI could stem from entirely new, undreamt-of opportunities, but highly rewarding ones.
The judgement of millions of professional and amateur investors is captured in the stock market. In a market that allows continual buying and selling, there is bound to be divergent views on the future opportunities of AI. The greatest danger, though, is not being invested and standing aside, or being forced to reinvest at much higher levels. The US mega caps are a case in point, having staged a remarkable comeback since April’s lows. Around 80% of the S&P has beaten earnings expectations in Q3 of this year, and NVIDIA’s share price has more than doubled since April’s ‘Tariff Tantrum’ – several of the large-cap tech companies boast similar performances. Certainly not a rally to miss out on, yet many may have been put off during April’s wobble. History shows us that while the stock market rises and falls, ultimately innovation and animal spirits win, and investors get paid for enduring the uncertainty over the long term.
With AI, the process of creative destruction, where new industries and companies emerge to replace the old, will continue or even accelerate. We will have to learn new skills, new ways of doing things, and even new words like “multiomic”. However, the biggest risk for a long-term investor is not being invested at all. There will be setbacks in markets which are impossible to time, but investors who can stomach the bumps along the way are often the ones who end up reaping the rewards. In investing, as in tea-leaf reading, there are no guarantees — only interpretations, judgements, and sometimes leaps of faith. The future may not reveal itself in the bottom of a cup, but it may well reward those willing to keep pouring.
Please be aware that the value of investments may go up or down and you may receive back less than you invested originally. Past performance is not a guide to the future.
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