The AI Trade

Key Concepts

• AI Proxies: Publicly traded companies benefiting from, or heavily involved in, the development and deployment of Artificial Intelligence (AI).
• Relative Performance: Comparing a stock’s performance against a benchmark index (in this case, the S&P 500).
• Bubble Behavior: Characteristics of a financial bubble, typically involving rapid and unsustainable price increases.
• Chad GPT: A large language model chatbot developed by OpenAI.
• Valuation: Determining the economic worth of an asset or company (e.g., OpenAI’s potential $500 billion valuation).

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Microsoft & the AI Narrative: A Relative Performance Analysis

The discussion centers around analyzing the stock performance of Microsoft as an “AI proxy” in relation to the S&P 500, specifically since the launch of ChatGPT in November 2023. The core argument is that despite significant hype surrounding AI and Microsoft’s substantial investment in OpenAI (a $10 billion investment and 10% ownership stake), Microsoft’s stock has not exhibited “bubble behavior.”

Performance Data & Observations

A chart comparing Microsoft’s performance to the S&P 500 reveals that, after an initial surge following the ChatGPT launch, the stock has largely moved sideways since April 2023. Specifically, the S&P 500 outperformed Microsoft by approximately 10% in the last year. This is presented as counter-evidence to the widespread narrative of an impending stock market bubble fueled by AI enthusiasm. The speakers explicitly state, “The biggest or second biggest publicly traded proxy for the bubble has gone sideways relative to the market for more than two years. That is not that is not bubble behavior.”

Defining "Bubble Behavior" & Contrasting Observations

The speakers define “bubble behavior” as unsustainable and rapid price increases. The lack of such behavior in Microsoft’s stock, a key AI proxy, is used to argue against the broader claim of a market bubble. The repeated assertion, “This is not a bubble. This is not a bubble,” emphasizes this point.

OpenAI Valuation & Specific Concerns

While dismissing a general market bubble, the discussion acknowledges that specific areas could be overvalued. The example given is OpenAI, with the question posed: “Is OpenAI worth $500 billion?” This highlights a distinction between the overall market and individual company valuations within the AI space.

Market Sentiment & Potential Future Scenarios

The conversation notes a positive market sentiment, with a perceived “fighting back” against the formation of a bubble – “I think people are saying we don't want this. I don't want We don't want a bubble.” However, the possibility of a bubble forming in the future is not entirely dismissed: “Still not out of the realm of possibility that it could it could happen, but I agree. We didn't get to like the crazy stupid phase.” This suggests a cautious optimism, acknowledging the potential for future irrational exuberance.

AI Proxy Considerations: Nvidia & Others

The discussion briefly mentions Nvidia as another AI proxy, characterizing it as “on steroids” compared to Microsoft. It also acknowledges the limitations of using publicly traded companies to gauge the true impact of AI, as key players like OpenAI, Anthropic, and Perplexity are not publicly listed. This underscores the difficulty in accurately assessing the AI market’s overall valuation.

Synthesis & Key Takeaways

The primary takeaway is that, despite significant hype surrounding AI, the performance of key publicly traded AI proxies like Microsoft does not currently support the narrative of a broad stock market bubble. While acknowledging the potential for future bubbles and the possibility of inflated valuations in specific companies (like OpenAI), the speakers present evidence suggesting the market is exhibiting more rational behavior than often portrayed. The analysis emphasizes the importance of relative performance and specific data points when evaluating market trends, rather than relying solely on anecdotal evidence or general sentiment.