Dear California friends,

It’s been a little while… I am back from a long trip in Europe, ready for the Bay Area’s Indian Summer. Are you?

A few days ago, my friend & fellow French expat’ Carlos Diaz, aka el Gringo of Silicon Carne (Apple’s #2 French language Technology podcast), published an opinion piece titled "Has the AI Bubble Just Burst?". The piece suggested that all this hype around AI might be a giant scheme to keep Silicon Valley and Wall Street's cash machine turning. I took the bait and reacted with a few others from his l'Hacienda community. You can read me in French here or in English below (with a lot of help from Claude 3.5 Sonnet).

Are we in an AI investment bubble?

This question resurfaced in early August when financial markets suddenly plummeted. The parallels between the Internet and AI are indeed tempting:

• Both are revolutions in computing

• Both are "enabling technologies," valuable for what they allow us to do faster, cheaper, or in new ways

• Both are heralded as transformative by experts, with the broader public often more dubious

• Both require hundreds of billions in infrastructure investments to be globally available

So, are we on the verge of a bubble burst leading to a prolonged IT depression?

Recall the NASDAQ crash starting March 2000, when 5,000 listed companies erased 5 years of gains in one year. This led to mass layoffs and numerous bankruptcies or consolidations. For every winner like Amazon or Google, there were hundreds of losers like Webvan or AltaVista. Even the consolidation survivors like Intel, Verizon or AT&T haven't regained their late 90s valuations 25 years later (Microsoft, Apple are the exception, not the rule).

Figure 1. The Internet Bubble’s Forgotten Unicorns 

Why is this time different?

There are 3 reasons why we are not in a bubble this time around. The first one is shared with the Internet (and explains why despite the Internet bubble bursting, most of today’s giant tech companies are Internet companies). The other two are specific to AI and make it a safer investment bet than investing in Internet companies in the late 1990’s.

1. AI's potential is extremely vast. At its core, AI is a way for computing to solve ‘approximately defined’ problems, and that greatly expands the IT sector’s addressable market. IT already represents $5 trillion in annual activity (Fig. 2), so what will a significantly expanded market size look like for IT? There will be some creative disruption happening for sure (think of the spreadsheet invention: bookkeeping jobs disappeared while accountant jobs grew), but from an economic value standpoint the gains will be massive.

2. Unlike the Internet bubble, we're far from over-investing. AI investment currently represents 0.5% of annual global GDP, compared to the 4.5% peak during the 90s Internet wave.

3. AI's potential will be captured at unprecedented speed. The world is connected today, so behavioral change is the only adoption barrier. Look how quickly Uber, TikTok, and ChatGPT converted new users.

A Few Winners And Many Losers

However, not all investments will yield positive returns. As always in "active" investing, there will be more losers than winners.

Tech giants will likely reap most benefits, having positioned themselves early and decisively.

• Unlike previous revolutions, they saw this coming, recruiting top AI researchers over a decade ago (Facebook, Google) and providing resources to rival the best-funded universities.

• In 2023, Big Tech contributed two-thirds of the $27 billion raised by AI startups (source: Pitchbook via the Financial Times). Adding their own announced investments of nearly $300 billion (1, 2, 3, 4), it's clear they're dominating the field.

New entrants face a tough challenge. We'll see very few multi-billion-dollar exits, contrasting with previous decades' startups. IPOs require profitability while remaining independent, which will be difficult in competitive markets dominated by hungry giants.

Where to invest for the best chances? That's the question we ask ourselves daily at Hacienda. If you speak French, you should consider joining us here to find out more.

Special thanks Hacienda’s community members Matt R., Arthur B., Steed M., Laura B., Olivier L., Haykal S., Carlos D. for their reactions, suggestions and edits.

1  Fun fact: Google’s total fund raising before reaching profitability was $26M, and the “chronically money losing” Amazon $62M… Different times