If You Think AI Demand Is Booming, Wait Until Your Girlfriend Starts Sending Outfit Pics

There’s a lot of debate about valuations and where we go from here. I’m going to break this down using a very simple example: my wife, Alex, trying on different outfits. My goal in this post is simple: use an anecdotal example to estimate AI demand going forward, which will help us better understand valuations.

At the macro level, the general consensus is that AI is going to continue growing and driving value but there are concerns that stocks are overvalued. To make this more concrete, look at a couple different examples of investor sentiment across the industry and then look at industry growth rates.

Investor Sentiment

• Janus Henderson conducted a survey where they found that “Two-thirds of investors (67%) are concerned about a potential AI bubble or AI-driven market correction in the near term. Over a longer horizon, sentiment becomes more constructive: 46% of investors expect AI to have a modest positive impact on market returns over the next five years, while a smaller but more optimistic segment (15%) anticipates a major positive impact.” (source)
• Nvidia’s PE ratio is 33 times LTM earnings. 21 times forward earnings

We can agree or disagree with Janus Henderson’s survey, but it’s evident in the market valuations that we’re seeing. Nvidia is trading at 21 times forward earnings. Using heuristics, that’s not a bargain and it’s not overvalued.

Industry Growth Rates

We’re not going to generate alpha by using heuristics. Let’s look at industry growth rates to develop a better understanding of how quickly AI demand is increasing.