How General Purpose Technology Booms develop – Part One
In this week’s video insight, I look at the dynamics behind major technology booms – from steam trains and commercial flight to the internet and now artificial intelligence (AI). In Part 1 of this two-part series, I outline the typical signs of a bubble: including soaring share prices, circular deals between companies, rising sales on credit, and financial engineering that makes growth look stronger than it truly is. We’re seeing many of these patterns in today’s AI boom. In Part 2, I’ll explain how these booms have typically unwound.
Transcript:
Hi I am Roger Montgomery and Welcome to this two part series on GPT Booms.
When I talk about GPT, I am not referring to OpenAIs ChatGPT but the abbreviation for General Purpose Technologies. We have seen those GPT booms before, the rise of international freight over sea, steam locomotion, the automobile, Commercial flight, the TV, the Internet and now AI.
In this, part 1 or our two part series, I’ll describe how GPT booms develop, with references to the current AI boom, and in Part 2, I’ll talk about how they end.
The first requirement of a GPT boom/bubble is defined by the hype that drives super-exponential share price growth. You can see this here in the first chart of Nvidia’s share price. The rapid, but ultimately transient growth of the expected price – faster than exponentials – for some investors the very definition of a bubble. It’s when the growth rate of the price itself accelerates, fueled by herding behaviour as followers hop on board out of a fear of missing out, creating a self-reinforcing cycle.
As the same price behaviour is evident in the Nasdaq index, let’s tick that off as a requirement met.
The next element is Bubble participants doing deals with their overpriced shares. This recent diagram published by Blooomberg that quickly went viral, puts paid to any doubts about whether that’s occurring. Indeed there has been a wave of deals done with shares including OpenAi and AMD, Open AI and Coreweave, and Nvidia and Intel. What might worry investors is that The cash, the compute, and the equity are all flowing in a loop with multiple players reporting the same wad of cash as their own revenue.
The next element is the existence of bubble participants buying each others products in an effort to demonstrate insider ‘faith’ in the technology and in its structural status as history making technology.
The worry, as this chart reveals, is that while the pace of the buying is accelerating, so to are the receivables. This is Nvidia’s receivables and what you can see is that sales ‘on credit’ is accelerating. What you can’t see is that the rate of increase in receivables is faster than the growth of revenue. Therefore a rising proportion of sales are on a promise.
Next, the presence of vendor financing, which is used to sustain the appearance of growth. This diagram shows the deals conceptually. Nvidia sells graphic processing units (GPUs) to a hyperscaler, who then pays cash to NVIDIA…but not really, you see, that cash is sent right back by Nvidia to the hyperscalers in return for shares. So ultimately Nvidia is vendor financing its own sales in return for equity in its customers. This is clearly unsustainable. Nvidia can’t keep diluting other shareholders in the hyperscalers forever.
Finally, you see a massive jump in capital expenditure and physical build out to scale the new technology. You can see the jump capex on this chart. What you can’t see is that the forecast are for an even more rapid increase in the next five years. This is all possible because there’s so much hype around the tech that share prices have surged, bringing down the cost of capital for the bubble participants. And with that lower cost of capital, and after all the equity deals have been done, companies, in a final wave of ‘pretend to extend’, start borrowing money. The AI boom has now triggered a massive debt spree among hyperscalers. In just seven weeks, Amazon, Google, Meta, Microsoft, and Oracle raised a staggering $US120 billion in bonds, suggesting cash flows are insufficient to cover exploding capital expenditures, projected to reach $US534 billion next year and consume 80 per cent of the group’s forecasted cash flow. And we know that because we’ve already seen Nvidia’s rising receivables (or lack of cash receipts).
Historically, GPT booms have all evolved along similar lines and in the next video we will discuss how these have historically unwound. So, that’s all for now and I will see you again soon.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
