Micron Technology's (MU) post-earnings share price drop and Nvidia's (NVDA) volatile sell-off didn't signal much confidence in the AI industry for investors this week. Could this be the first sign of an AI bubble materializing?
To answer these questions and more, Mitchell Green, founder of Lead Edge Capital, appeared on Yahoo Finance's Catalysts to discuss his long-term vision for the artificial intelligence industry.
“If you think the hyperscalers are going to put a lot of money into it, you should say they and the Singaporean government and the Middle Eastern governments are going to put more money into this space next year. If so, you're probably long. If you think this capex is a bit of a bubble, you're probably short. We think it's very real, but it's going to take a lot longer for this space to come to fruition than people think.”
Green said it may be some of the AI ”incumbents” that actually come out on top at the end of the long-term adoption timeline.
To learn more about expert insights and the latest market trends, click here to watch this full episode of Catalysts.
This post Luke Carberry Morgan.
Video Transcript
The stock fell today as the company's forecasts did not live up to the high expectations investors had for the AI space, and the company in particular.
This comes as the video industry surged this week after the company briefly overtook Microsoft as the world's most valuable company.
Its shares are currently down almost 5% over the past five days.
So, should investors be wary of a possible upcoming AI bubble?
Joining us at Studio Mitchell today is Mitchell Green, founding partner at Lead Edge Capital, a venture firm focused on the technology and software sectors.
Thanks for coming.
Thank you so much for inviting me.
So tell me what's going on in terms of focus?
Because this is obviously causing some concern for investors who like to say “the new Cisco” in their videos.
Do you see this moment as a bubble?
Do investors think so?
Are you saying they're overrated or are you saying you're going to ride Cisco for a while?
Still, NVIDIA believes both are laws, and so they think AI has set them back.
We think AI is very real.
We ourselves have not invested in AI.
I'm glad I went in.
Why, why?
I think that's true.
It seems like it will take a lot longer than it actually does, but this is especially relevant for NVIDIA.
You own NVIDIA today.
It's something like $20 for 100 shares.
Generally speaking, next year's earnings will be around $4-5.
So, if you take into account the growth rate, it's 30 times the volume, so it's not that expensive.
I'm just thinking about one fundamental thing.
If you believe in hyperscale, they are far removed from competitors like MD and the smaller companies attacking on the periphery.
But they built a great business and great tips.
If you believe that hyperscalers are going to put a lot of money into this, then you should say that the Singapore government and hyperscalers in Middle Eastern countries are going to put a lot more money into this next year.
And if you think this capex is a bit of a bubble, it's probably short-term, which we think is very real, but it's going to take a lot longer than people think for this to become a reality.
And we think that this is going to dramatically reduce costs over time, just like the telecommunications bust of the late 1990s and early 2000s, where people overbuilt capacity.
If you wanted to build a website in 1997, you would take some microsystems and spend $50 million to build the website we have today.
I take out my credit card, spend $25 and go to Go Daddy.
The same will happen with AI.
So what are the results?
Well, I guess if a lot of the VCSs are putting money into these companies, there's going to be a lot of zeros.
What's interesting about AI is that there are three things people don't think about.
With the introduction of that phone on your desk, the iPhone coming out in 2007 or 2006, how many companies don't exist after 2000, how many companies don't exist before 1997?
Ah sorry, 2007.
How many new companies have been founded that are worth over $100 billion?
3 Bytes, Danspin Dodo and Uber are just three, can you guess who wins?
Incumbent.
So the incumbents are the big incumbents like Salesforce, Microsoft, Oracle, Google, Small Snowflake.
They will all win two.
I've never seen such growth in a company before.
To borrow a phrase from a very famous VC:
We've never seen such growth in business before, but we've never seen such volatility either.
In other words, total dollar retention isn't that good.
That means a lot of people are trying this but not gaining customers.
So, it's a lot more project-based now.
And I think it's probably going to be some kind of bubble.
But will we see those companies?
Will smaller ones fail?
Will they be bought out?
In terms of consolidation, I think a lot of people would say we're going to see some consolidation within the industry.
Many startups will not succeed.
But will we see more big companies like this in the future?
Does this mean that established companies will acquire parts of smaller companies?
And when you talk about that timeline, but more realistically, when you talk about that timeline, does everyone seem excited about it?
Now, seeing total retention rates rising, what does it take to get involved?
So total retention means that your audience will earn you $100 per year over the next year before you do any upselling or anything like that.
Do you end up with $70 if you don’t acquire any new customers, or do you end up with $95, which is top of the line if you think about your salespeople?
It's nearly impossible to break away from products like Salesforce, Oracle, Microsoft Office, etc., and these products are very difficult.
But if your total customer retention rate is 70%, that means 30% of your customers are going to leave every year.
And we know that retention is very low. If total dollar retention went up, that would be interesting.
Yeah.
90 and above.
Okay. Just to briefly explain, in less than a minute, you said earlier that your biggest mistake of the last decade was not predicting the expansion of the stock index.
Are you likely to make that mistake again?
They might do so by not getting it with AI for now.
But that's okay.
You don't have to do that, you can stick to a boring software company like Pacem, or a company that develops cardiac monitoring software, or a growth zone that develops a chamber of commerce.
In other words, with 40% of the software industry struggling this year, now is the best time to invest in companies.
But again, a significant portion of our portfolio will ultimately be sold to private equity.
So over 60 percent of our companies are highly profitable companies that you've never heard of before, like Growth Zone, GVL, Pace Mate, and others.
They will never be a big IP OS.
We don't need that, we'll sell them to one of the 100 private equity firms or to a strategic company and try to make 2-5 times more money than if we were to bet on the IFPO market.
come back.
The reason the IP O market is not doing well right now is because if you put your money in Wellington, Tre or Fidelity, it's easier to get into Microsoft, Facebook, Google and NVIDIA.
They're growing super fast because I think the biggest challenge for a lot of software companies is that when you look across the software ecosystem and you look as a public company, you're not growing that fast anymore.
Many of them have slowed down considerably.
Well, Matt Green, we have to wrap this up here, but thank you so much for coming in to the studio.
We look forward to meeting you again soon to continue this conversation and partner with Lead Edge Capital.
Thank you so much, Michelle.
Thank you for the invitation.
