How General Purpose Technology Booms end – Part Two
In this final part of my two-part series on General Purpose Technology (GPT) booms, I explain how these cycles typically end. History shows that even world-changing technologies – from cars to commercial flight – delivered poor outcomes for most early investors. This is because technology trends eventually run into the reality that customers don’t spend money in a straight line (their demand rises and falls), and also the concept of “creative destruction” (wherein new technology leads to the obsolescence of outdated products). These cycles are exactly why it’s important to diversify and regularly rebalance your portfolio.
For further reading on this topic, you can access the following blogs:
A pivotal moment for the AI Boom?
It’s a matter of perception
Transcript:
Hello, I’m….welcome to this video insight, the final part of our two-part series on GPT (General Purpose Technology) booms and how they end.
Today, we are talking about how they end. Before we get started, let’s briefly summarise the last video…Generally, there are five components to a GPT boom that becomes a bubble.
There’s the exponential share price growth (tick), there’s the bubble participants investing in and dealing with each other using their overpriced shares, then they buy each other’s products to prop up each other’s revenue and demonstrate ‘insider’ faith in the technology’s utility. Vendor financing is used to support more revenue growth and then, thanks to the hype, and the consequent drop in the cost of capital, we see a massive surge in capex and the buildout of the technology to ‘scale’ the opp[ortunity, which of course has an unlimited total addressable market.
General Purpose Technologies of the past, such as the automobile, electricity, commercial flight, steam locomotion and TV, have all changed the course of human history and yet more than a thousand car manufacturers have disappeared from the US and none exist today that are profitable and have not been bailed out by government or private equity. Commercial flight changed the course of history and yet, not a lot of money has been made in aggregate by airlines over the decades. History is replete with GPTs that were good for consumers – that did indeed change the course of history – but not so great for early investors.
As I mentioned the hype surrounding a new technology generally brings down the cost of investment for the participants, and they naturally take advantage of that cheap capital to build out and scale that technology in a fast-paced land grab. The big problem is the consequence of this massive land grab. It’s called overcapacity. When overcapacity occurs, investment returns disappoint. Disappointing returns transpire because even though “this-technology-is-going-to-change-history” it usually isnt going to right now. .
The perception or assumption today is that the AI theme is structural and uninteruptable. Few question whether the tech will change the course of human history. I believe it will. But I also believe that the suppliers of this tech must ultimately deal with customers whose demand isn’t structural – theirs is cyclical.
When a structural theme meets a cyclical commerciality, it’s the cyclical commerciality that wins.
What’s next is a period of Creative Destruction. Those of you who remember the tech wreck of 2000 will recall the term Creative Destruction. As price gains unwind, everyone other than the earliest investors loses between 60 and 95 per cent. Many are wiped out.
Investors cry out – “but Nothing has changed”. Why are shares collapsing if the theme remains true? What’s happened is a reality check – the time frames are wrong. As the share prices plunge and volatility increases, the cost of capital rises and all that debt that was amassed at the end of the boom, sends some companies to the wall. That’s what’s changed.
Could that be why, as this chart shows, we have seen so many insider sales of Nvidia shares, but no insider buying?
Now, at this point, governments and central banks – fearing a recession, because trillions are being written off – may step in, using a variety of tools at their disposal, including buying the bonds or the equity of the bubble participants. And maybe this is what Open AI’s Sam Altman and Sarah Friar were talking about when they threw out the idea of government backstops.
If that happens, investors might be rescued.
Nevertheless, investors are confused because they have correctly predicted the life-altering nature of the technology but the companies they invested in are collapsing. Did you know there were once more than 1000 TV manufacturers in the United States? Today there are none.
If left to run its course, eventually, after the massive losses, buyers of distressed assets secure the technology from the distraught investors of the first part of the hype-cycle, and ensure the technology is widely and affordably distributed and the course of human history begins to change as the tech is widely adopted.
The tech will change lives and will change the course of humanity, but a period of creative destruction is often required to make that technology affordable. The process of invention, hype, low cost of capital, over capacity, creative destruction and distressed buying is the process that ensures the technology does change the course of human history, because it is the process that puts that technology into every human’s hands.
We have written a a huge number of blog posts and news articles on the subject of the AI boom. If you would like to dig deeper, including finding out about hwo to rebalance and diversify, please visit my blog at Rogermontgomery.com, follow us on Facebook and X or send an email requesting links to the best articles to info@montinvest.com.
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.
A great analysis. The reminder that even world-changing technologies often deliver disappointing returns for early investors is an important perspective, especially in today’s AI-driven market. Structural innovation still has to face cyclical demand and many forget that. Thanks for the insight.