The AI boom is a “bubble” driven by the “momentum” of rising stocks like Nvidia, says fund manager Bill Smeade.
“Dogs chase cars, people chase stock,” the founder and chief investor of Smead Capital Management told Business Insider in an interview.
Nvidia's stock has skyrocketed 12 times since its launch in 2023, surpassing the market value of AI chip makers to an unprecedented $4.4 trillion.
Palantir's stock rose 28 times during the same period, valuering the manufacturer of AI-powered data analytics software at around $420 billion.
“We're in a crazy phase,” Smeade says, citing the example of CoreWeave, generating $1.2 billion in revenue in the last quarter, but with a market value of $60 billion. The AI cloud computing company reported a $30 billion revenue backlog at the end of June, backed by expanded contracts with key customer Openai.
“It's late '99,” Smeade said.
“This is the same as all the major enthusiasts of the past from a fundamental perspective,” Smeade said. “We're now bumping into history.”
Smead said the issue is not whether AI companies recognize the potential benefits of technology, but that “the success they may have is already overcapitalized on a large scale.”
He said, “When this is going to break,” people would be willing to buy AI stocks for just a small portion of their current price.
Oracle Stock rose 40% earlier this month after forecasting rapid revenue growth for its cloud infrastructure businesses that cater to AI companies such as Openai.
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But if it could rise significantly in one day, it could fall 40% in one day, Smead said.
“It's going to be creepy,” he said.
A value investor with over 40 years of experience said he was concerned about the “incredibly unusual” close incest relationship between major AI companies. Nvidia recently agreed to invest up to $100 billion in Openai to help CHATGPT makers fund build-outs of AI data centers powered by NVIDIA chips.
Smead said he is “very worried” that so many people have so many savings in big tech stocks.
“I'm watching people build $10, $20,000,000,000 homes in my neighborhood in Paradise Valley, Arizona,” Smeade said. “If the market gets sour and tech stocks get crushed, that high-end home construction will halt.”
However, he said investors should not fully cash out of stocks and should not wait for crashes, saying “we can't hold our breath until then.”
Smead said his funds have largely circumvented high-tech stocks in favor of energy, home construction, healthcare, retail and real estate investment trusts or REITs.
“We own a number of credit companies in many of our favorite sectors,” he said.
