URGENT UPDATE: Goldman Sachs’ chief US equity strategist, David Kostin, has just revealed a shocking insight regarding the current state of artificial intelligence (AI) investments. In a recent podcast episode aired on October 12, 2023, Kostin emphasized that the true AI bubble is forming in private markets rather than in the public stock arena, which has many investors anxiously misplacing their focus.
Kostin, who is set to retire after a remarkable 31 years at Goldman Sachs, stated that private AI firms are experiencing unsustainable valuations driven by excessive capital inflows and unrealistic growth expectations. “I believe in the private markets, the availability of capital, the price is probably unsustainable, which one could take as a synonym for a bubble,” he explained. This revelation is critical for investors navigating an increasingly volatile landscape.
The strategist pointed out that while stocks of publicly traded AI companies, like Nvidia, have seen dramatic price increases, these surges align closely with their earnings growth. Nvidia’s share price has soared 12-fold over the past three years, mirroring a 12-fold increase in earnings, demonstrating a healthy correlation absent in past tech bubbles.
Kostin’s insights draw from the theory of legendary investor George Soros, who argued that rising prices attract more capital. “As these firms are raising capital, the growth rate increases. As the growth rate increases, the valuation increases,” Kostin noted, highlighting a troubling cycle fueled by optimism rather than solid fundamentals.
This bubble dynamic in private markets raises alarms about potential risks from “circular financing” or “vendor financing,” where growth relies heavily on external funding that may not be sustainable. “At some point, the vendor doesn’t necessarily have the same growth to be able to fund that growth,” he cautioned, signaling a precarious future for private AI firms.
In stark contrast, Kostin assured that the public market remains stable, with companies in the S&P 500 trading at around 30 times earnings, significantly lower than the 40 times peak seen in 2021 and the astonishing 50 times multiples during the dot-com boom. Additionally, this year has recorded only 55 IPOs larger than 25 million USD, a stark decline from 280 in 2021 and nearly 400 in 1999, indicating a more cautious capital environment.
Kostin concluded that while capital is available in public markets, the atmosphere is far from exuberant. “It’s there but not so dramatic,” he said, urging investors to recalibrate their focus on where the real risks are lurking.
As this story develops, investors must remain vigilant and informed about the shifting dynamics of the AI investment landscape. With the potential for significant market corrections, now is the time for stakeholders to reassess their strategies and ensure they are not caught in the wrong bubble. The implications of these findings could resonate throughout the financial world for years to come.