Transcription
This is carrying the macro economy a lot more than the dotcom boom did. You didn't get the kind of investment into the economy. You're getting it across the country in the building of data centers, people being employed, you know, the power companies, the water being demanded. There's collectively a lot more accounting for here if there's a correction than there was in the dotcom boom.
In other words, it will be worse. It'll be more marketwide. It won't be just a tech company correction. It'll be a correction across more sectors than you did then and more of a macroeconomic hangover that'll take a little longer to get through.
Today's number: 1 million. That's how many dollars worth of Yu-Gi-Oh cards were found in a Texas dumpster last week. Ed, true story. I am literally swimming in Pokemon cards because my son, uh, listened to me and Swath's podcast and is spending all of his money on Uber, Deliveroo, and Pokemon cards. Not a joke, just an observation. Just a little insight into my life. Ed, how are you?
I'm doing well. Deliveroo, that's a name I, I, I forgot about. That's the English DoorDash. Actually, the Australian DoorDash. Yeah, Deliveroo. What's he ordering? Wagamama. Nando's. What are the hits? What are the hits?
Oh my gosh, you're very in touch. If it were up to my son, he'd, he'd eat Five Guys three times a day. And unfortunately, he's actually pretty good at this Pokemon thing. He's trading. He goes to these, it's, it's, to be honest, I'm very impressed and proud. He'll take a train out to where, like Heathrow Airport, and there's some conference going on near there. He goes strapped with a ton of cards and a few hundred pounds in, in cash, and he trades cards, and then he comes home and he sells them, and he uploads it to his green light so he can take Ubers everywhere and order all, all manner of food from different restaurants, and we'll get, we'll get a bang at the door, and I open it, and it's like, code, and I'm like, oh, it's for him. He orders his own food now. And then I say, that's it. We are not paying for this. He's like, "You're not paying for it. I sold a a Gawa card this morning." So, anyways, his economic independence is, is getting in the way of, uh, my ability to discipline him.
That's awesome. Good for him. Running the hedge fund. That sounds great.
Guess where I'm going tomorrow?
Where you going?
I'm going to Poznan, Poland for a conference. It's a big deal.
There's a huge conference there.
What are you going to do there?
Speaking for money. Um, but it's, here's a crazy stat. If Poland continues its growth for the next four years, it'll be a bigger economy than the UK.
They've been one of the, one of the real winners from the war, Austral. I mean, I think their stock market has ripped the past couple of years.
Poland has just sort of done everything right. You're right. They have been a big winner. It's been a fantastic, it's been a fantastic economy and success story. Well, we have a bit, big episode, an exciting episode to get into today. We are talking with Asswath Deodoran, uh, in our very first live stream. But before we get into that, I just want to point out that it is 12 days until the Prof Markets tour kicks off. We have a sold-out show in San Francisco on May 27th, but you can still get tickets in LA, Miami, Chicago, and New York City, where we will be finishing the tour off with the one and only Anthony Scaramucci, the Mooch, who will be joining us on stage on June 2nd. I cannot wait. I mean, the Mooch just always, he's always a banger, always brings the energy, and it's going to be a lot of fun. So if you want to go see those shows, uh, you can visit profgmarketsour.com to get your tickets now. That is profgmarketsour.com. 12 days. Link is in the description. And with that, let's get into our episode.
Welcome to our first ever Prof Markets live stream. We have an incredible episode for you today. We are joined today by the man, the myth, the legend, the one and only, the dean of valuation, our friend Asswath Deodoran. We're doing another quarterly review. And the great thing about this live stream is that we will be taking your questions, or at least Professor Deodoran will be taking your questions. So if you want to drop a question, ask a question, drop it in the chat, and then we will save some time at the end of this interview, about 10 minutes, and we will answer a few of those questions. But with that, let's get into the show.
It is that time of the quarter when we like to check in with one of the market voices we trust most. Late last year, he warned us that there was no place to hide in stocks. We also met again in February, and we pointed out, and he told us some of the catastrophic risks that the market seemed to be at least slightly ignoring. And now, with the ongoing conflict with Iran, and with three major IPOs approaching, and with AI continuing to push stocks to now record highs, it seemed like the perfect time to bring back Professor Aswath Deodoran, the Kershner Family Chair in Finance Education and Professor of Finance at New York University Stern School of Business. Professor Deodoran, thank you so much for joining us again. We're so excited to get your update. Let's just start very broad here. Uh, I look at the S&P today. When we last spoke, on a, on a multiple basis, on a forward PE basis, it is lower than when we last spoke. However, it is also up almost 8% year to date, which is quite striking, really. When you just look back at the, the first quarter that we've seen here, what has struck you about the markets that we're seeing in 2026?
The resilience. I mean, I think that, um, if nothing else, markets seem to be showing that they can withstand shocks that they would not have been able to withstand a decade or two decades ago. You know, one of the things about markets is the first time you disagree with markets, you can say, "Markets are wrong, I'm right," and be okay with it. The second time around, you keep saying it, but the third or the fourth time, you, you got to stop and ask, "What is it that's changed that I'm missing in markets?" And I've been thinking a lot about that because starting in March, when we entered this, this new, new crisis with the conflict in Iran, I actually started estimating what's called an equity risk, the price of risk in the market, like a, it's a temperature gauge for the market. And what astonished me in March, at, at the height of, of the market, even the markets going down that month, was how measured markets were in response to the crisis. So, I think the key word here is markets seem to take whatever is thrown at them and come out on the other side intact. And one side, people might say, "Well, this is because markets don't see what's coming." And the other, you got to stop and ask, "Maybe there's something that's changed that's allowing markets to do this."
When you look at the conflict, uh, in Iran, I mean, just when I look at it, my sense is this isn't coming to an end anytime soon, or at least they keep on saying it will. It's going to be next week. It's going to be the week after that. We're gonna get a deal. We're not gonna get a deal, etc. It keeps on going, going on. And continually, gas prices are rising, up 30% since we launched this thing. And it seems that this, I don't, I don't see how this is really going to change. And I guess I'm sort of waiting for that moment where it does have an impact, where it does impact consumer spending, where it does end up impacting stocks. But I guess that moment just isn't arriving. Do you think that moment will arrive? Are the markets pricing in that it won't?
I think at the moment, if all that happens is gas prices stay at $4.50 or $5, the market, I think, is okay with that. I think the, the, the catastrophic risk here is not that oil, gas prices stay higher than they were before the conflict, is whether they'll go even further up, because there is that chance of that happening. I think if, uh, you know, in many ways, what the market seems to be building in is the economy can survive with gas prices being $4.50 or $5, depending on what part of the country you're in, and that it might not be as robust as you thought it was 3 months ago, but it's okay. But I think the, the, the worry still remains that this crisis, while it's in a slow boil, at any point in time could become a fast boil, at which point you could say, "What, what happens comes to earnings now?" And I think that's the part of the story that I find most, most interesting. The earnings forecast at the start of March, before the conflict started, for the S&P 500, I've been tracking them on a weekly basis. You know what? Those earnings forecasts now are higher for next year and the year after. They're lower by a little bit for this year, but in, in some strange way, it's almost like analysts are projecting that earnings will get moved to next year and the year after because of this crisis, and that they will actually go up as a result of the crisis. Now, you can accuse analysts of being over-optimistic and perhaps skewed in their thinking, but the market seems to been able to deliver on earnings even in the midst of crisis for the last 10 or 15 years. And I think that's what the market is building. And it's ultimately, markets are not affected by political crisis or economic crisis directly. They're affected by what they do to earnings. And at the moment, that's what I'm keeping my eyes on, is is real damage being created to earnings. And up till now, we're not seeing the damage show up in forecasts.
As good to see you. The, I've never seen, and, and maybe there's a historical precedent that I'm not aware of, but I've never seen a number two become the number one as quickly as Anthropic has become the number one. Right? December, clear number one, OpenAI. April, clear number one, Anthropic. And in the private market, Anthropic is now being valued at $1 trillion. Would you buy at that price? What are your thoughts on the respective valuations of OpenAI and Anthropic?
I'm impressed by what Anthropic has done. I mean, ultimately, with LLMs, I said the test is how quickly you pivot to having business applications that actually make money. And Anthropic has been the quickest, I think, to pivot to actually creating something that people can use right away. Whether you're a banker, a lawyer, I think I've been, I've been very impressed with what they've done. I think a trillion is still asking for a lot. It depends on how much these applications pay off for Anthropic over time. But I think they're, you know, of the different LLMs, they're on the fastest growth trajectory in terms of being able to get applications going and money coming into the companies. I mean, these companies are still money-burning machines. I think the question is when will that, will that cash burn start to decrease, and Anthropic seems to have the best trajectory to start to bring the cash burn down, if not make it positive.
So you recently, um, you published "Two Trillions of Dollars and Beyond" and put SpaceX's intrinsic value at $1.2 trillion. So SpaceX, I think it's about $16 billion in U.S. revenues, growing $8 billion in IBATA, growing, I think, 24% a year. And then I look at Anthropic, and I understand it probably doesn't have the same moats as a SpaceX. But I look at Anthropic, which has jumped to $30, and I think it's headed towards $40 billion in ARR. And it, it looks as if it might 10x again. It's been 10xing every year. Why would SpaceX be worth $1.2 trillion in your mind, and Anthropic be only worth $1 trillion? Get discern how you value each of those sectors.
I think it, it goes back to what you said first, which is it's all about moats. I mean, these companies are all about future growth, future revenues, future margins. And SpaceX has, at least on two of its three business lines, clear moats. I'm not as impressed with the XAI part of, of SpaceX as some people are. For some people, that's the excitement factor because you can throw the trillions of dollars around much, much more easily. But if you look at the space launch business and, and the satellite internet business, SpaceX has the strong, has much stronger moats than any of the other tech companies because I can't think of very many companies that can compete with them head-to-head in those spaces. So if you believe there's going to be growth in those spaces, I think SpaceX is going to have a dominant market share of those spaces, and that's what gives them the pathway to the $1.2 trillion. But the $1.2 trillion requires a lot of things to go right. I mean, I think, I think if, if those things go right, then the $1.2 trillion plays out. I think Anthropic has higher revenue growth near-term than SpaceX does. I mean, I think that's, that's almost a given. The question is how the margins in this LLM-based business will play out over time. And I'm just, you know, I think that Anthropic might be in the best shape of all of the LLM companies, but I think it's going to have to find a way to generate profit margins that are high and steady state. I mean, right now they have the advantage, but will that advantage sustain itself is the question.
Taking the aperture back, I heard a very interesting, uh, comment that you might see if, if AI becomes the, the, if you will, atmosphere where almost any company in the technology or information sector, which have traditionally traded at the highest multiples, has an existential risk of obsolescence at the hands of AI. Is it possible that we might see just a reduction in the value of terminal value? In other words, is there, is there just greater risk to all future cash flows amongst the companies that have traditionally traded at the highest multiples?
I think it puts every corporate life cycle at risk of shrinking. I mean, to me, terminal value is about capturing what happens when you get to the end of your, what I say, your forecasting period. I mean, the 20th century companies stopped in year five or 10 and said forever, and then used that perpetual growth model. And I've always been a little cautious about that with tech companies. And I think what AI does is it takes every tech company and makes that forever into an even more difficult assumption to sustain, which effectively reduces terminal value because it means that instead of using forever, using an extra five years or an extra 10 years after you get to the end of your forecasting period. I think how it plays out in valuation will depend on what it was, what we don't know what the market was already building in before AI came along. We kind of try to reverse engineer it. But I think that, uh, with AI, those, those assumptions about how long companies will last will have to come, will, will have to be addressed much more directly. And I think that's what you're seeing play out in the software space, right? For, you know, where, where the, the existential threat is on the horizon, you, you have to start building into the pricing.
Just going back, uh, as to the general, the market at large, and the performance we've seen, and you've pointed out correctly that the earnings growth that we're seeing is just phenomenal. Um, and so, you know, when we look back at what's happened here, if we're, if we're looking at the backward-looking indicators, it's sort of like, yeah, everything's going great. But it also seems that it's basically all AI at this point. That you have a market that is increasingly dependent on the revenues of a handful of companies that are building data centers, and the revenue is being kind of shared and arguably moving in a circle. Some of the similar dynamics that we were worried about last year. It seems that those dynamics are still the same. It's just that the numbers are way bigger. Um, and so I guess maybe that's fine, but I just wonder how resilient that earnings growth really is in your view. And do you worry that maybe it's too, it's too AI-focused? It's too chips-focused to the point that it's, it's actually not as durable as perhaps we might think.
I think that, that for the companies building the architecture of AI, you're absolutely right. The Nvidia companies, uh, the, the chip, Nvidia, and the chip companies clearly benefit from the building of. But for the most of the other tech companies, AI has been an expense rather than an income stream. So, you know, you take the, the rest of the Mac 7. It's true on the cloud business, you're benefiting a little bit from AI, but you look at how much they're spending on AI. You know, even if you just count the depreciation part of their capex, that by itself is putting downward pressure on earnings rather than upward pressure. Then. So, I think AI is a big part of the growth story. It's still not a big part of the collective earning story. It might be a big part of the earning story for some companies, but if you look across the S&P 500 and look at the earnings to the S&P 500, AI is not a net plus yet, I think, to the S&P 500 earnings. But the fact that earnings are holding up in the face of this much expenditure on the part of these other tech companies is, I think, impressing the market.
We'll be right back after the break. And by the way, we are heading out on tour at the end of the month. So, for more info and to get tickets to a show near you, head to profarketsour.com. Hey guys, quick request. If you're watching this episode and you haven't subscribed to our Prof Markets YouTube channel, please subscribe now. And if you want to get notifications of all of our latest episodes, just click on the bell icon. We really appreciate it.
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We're back with Profy Markets. Just going to, uh, I saw an pretty incredible chart, um, showing the spending commitments across Microsoft, Oracle, Google, Amazon. I apologize, I'm looking at it on my phone right now. But when you look at OpenAI spending commitments and Anthropic spending commitments, and you put them together for, uh, for Microsoft, it makes up roughly half of their revenue backlog. For Oracle, it makes up more than half. For Google, it makes up 43%. Amazon, 51%. Um, which brings back these, again, to go back to these concerns that we're kind of dependent, at least the AI story is dependent on too few companies. You've got all of this revenue growth, these incredible numbers, but ultimately it's two companies that are driving half of it. Um, a lot of people are quite concerned about this and feel that maybe again, that this is an indication that the revenue in the AI story isn't necessarily real, or that we're kind of recycling the revenue that the VCs and the Nvidia gave to OpenAI and Anthropic, uh, and then it's coming back to them. Are you concerned about this? I know we've discussed this before, but we're kind of still in the same place.
No, I think, you know, concern is always, I mean, when you're investing this much on a big bet, I mean, let's face it, you know, without the AI spending, we'd probably be looking at GDP growth, I don't know, to in the negative. We, we'd very quickly start to push towards recession-level growth. So I think that, you know, we need to be concerned collectively. I think we're probably overspending, because that's a history of this kind of boom. Now, the question is, when will the bill come due, and how will it come due? Because, you know, the, when you overspend, at some point in time, you have to start writing off things. So, at least on a large subset of these companies, there'll be write-offs. You know, when I wrote about Tim Cook stepping down, one of the points I made is the other, the rest of the Max 7 are making this insanely big bet on AI paying off. And if it does, they're going to look like heroes. And if it doesn't, there's a lot of cleaning up to do. A lot of corporate governance issues that are going to come to the surface. So there is pain down the road, but for the moment, for these companies, being out of this game is not a choice that they think they have. They have. So some of this, almost, it's almost like they're on autopilot. They have to spend because everybody else is spending, and if it doesn't pay off, then they're going to be held accountable, and markets are going to have to deal with the consequences. I think when we talk about earnings of big, you know, you look at the concentration of market cap in companies, there's also a concentration in earnings coming from, from relatively few companies. This is a top-heavy market, not just in terms of market cap, but in terms of earnings as well. So that's always a concern when a few companies account for a big chunk of earnings. All you need is a couple of them to have serious downturns, and you're going to see collective earnings go down. So I think that concern increases because of the concentration effect.
When people talk about the, the dot-com bubble, that was kind of a similar dynamic. Like there was so much momentum, so much excitement, the valuations of a handful of companies just exploded. Their share of the, the entire stock market and the index exploded, and then suddenly the music stopped, and you had this incredible drawdown. It was extremely painful for investors. I kind of thought that we were, we had moved on from that, that we didn't think that that was going to happen anymore. Like investors last year were very worried about this. I kept on seeing the charts where it's like, "Look, it's the same as 2000." And then there was nothing. But it seems that in the last couple of weeks, that started to come back, and personally, I'm starting to feel a little worried about that myself again. I, I wonder if you feel the same way.
I mean, I think every market crisis is different. That's part of the problem with trying to replay history. Is you look at 2000, I learned from that. Let me bring the market learning is very transitory. You learn, and then it turns out that what you learned is not that useful in the next go-around. My view is there is going to be a correction. It's going to look nothing like the 2001 correction. There will be a correction. It will be painful. Those will be the two common features. But what triggers it, how it happens will be different. And part of the reason for that is the dot-com boom was not built on the capex spending that AI was built on. It was built on expectations and hopes and web pages and websites and, you know, online activity. So this time around, I think the macroeconomic costs are going to be greater from a correction because this is carrying the macroeconomy a lot more than the dot-com boom did. You didn't get the kind of investment into the economy that you got, a lot of employment, a lot of people in Silicon Valley getting jobs and high income. But this is more than that. You're getting it across the country in the building of data centers, people being employed, you know, the power companies, the water being demanded. There's collectively a lot more accounting for here if there's a correction than there was in the dot-com boom. So that pain may be more widespread because in 2001, if you weren't in tech companies, you could sit back and not feel as much pain as they did because you felt you weren't affected. I don't think you'll have that luxury this time around.
In other words, it will be worse.
It'll be more widespread. It'll be more marketwide. It won't be just a tech company correction. It'll be a correction across more sectors than you did then, and more of a macroeconomic hangover that'll take a little longer to get through.
When we last spoke, we were, we were discussing some of the, the more systemic risks, um, to the markets. We were discussing, I think we were talking about the war. We were talking about potentially the, the, the AI story losing its momentum. I think we're also maybe talking about, uh, national debt, which also, we could get into, which just surpassed 100% in the US for the first time, uh, since the end of the world, of the second world war. What, where do they rank for you? Like, when you think about how this market, if it were to unravel in a certain way, like which one to you at this point is front of mind, most likely the most, uh, relevant?
The war is the more, most immediate one, because one of the problems with the AI expectation boom being the disappointments is I'm not even sure what form that takes right now. There is no number. If you don't beat, you say, "Oh my, it's not working." So one of the problems when you, when you don't have a good feedback loop on whether something is working, it takes a long time for people to wake up and say, "Oh my god, we invested too much in AI." I'm not even sure what form that that correction will take. It will, it will show up. No, the war, though, is going to be more immediate. So, in terms of sequencing, the war is the immediate issue, and I think that's what the market is going to be watching on a day-to-day basis. AI is more of a longer-term issue where if there are disappointments, they're going to come in. It's going to pile up as a bunch of companies not being able to deliver what they thought they could. The debt has been with us for 40 years. And to be honest, of the three problems, it goes to the bottom of my list because, you know, Japan is 180% of GDP and, you know, and it's had it for a long time. Debt by itself is not the issue if you have the economy to back it up. What gets debt-ridden companies in trouble is you have GDP shrinkage, and the debt continues to grow, which it's a real possibility in the US. But it's going to be triggered by one of the other two things happening, either the, the war or the AI breakdown creates an economic, you know, shrinkage, which then makes the debt into an even bigger problem.
Speaking of a top-heavy market, I don't think there's ever been a sector that has accelerated as quickly in terms of valuations as a sector as chips in the last, call it, 60 days. 10 years ago, 3% of the S&P. As we sit here today, at 17%. And my, my understanding is the, the entire sector as a whole is up 60% in just the last couple months. Give us your sense. I was looking at Micron, and I looked at, you know, it's up 160% or something since the beginning of the year. But I looked at a chart and it looked as if the argument the bulls were making is that this might be the next Nvidia, just around, I guess, memory as opposed to processing power. Thoughts on the chip sector and valuations within the sector.
I think it goes back to the AI investment. The demand for chips is so high that at some point investors say, "There's no way Nvidia can even supply this much, even if it, you know, even if if the." So I think part of the, the expand, because early on, for the first two or three years, Nvidia did well, and the rest of the chip stocks basically stagnated or actually declined. Right? It's only in the last year that you've seen the rest of the chip business take off. And part of it comes from this insane demand for, for chips out there. I think that, you know, the, to me, the bulk of the, the run is done. So right now, it's a question of consolidation in this market and a cleaning up. I mean, I was lucky enough to buy Intel. I never anticipated the kind, the kind of buildup that happened. But I think, you know, much of the reason I've succeeded is nothing to do with picking the right company. It's being in the right place at the right time, and the entire sector took off. But I think at this point, the question is whether the market can consolidate those gains or will, I think, partly there is going to be a correction in some of those companies because we've run up too much, too quickly. But I think this is just a reflection, the chip demand is so intense that everybody can share in the spoils now, not just the, the, the one or two winners that the market was identifying.
Well, so just to double-click on that, uh, one, love to get your views on Intel after, you know, year to date, it's up, uh, it's tripled, and over the past year, it's up 6x. Uh, what you think of Intel right now? And also, I was looking at Chinese chip stocks. So our chip stocks, you know, Intel's trading at 120 times earnings or something, but a lot of the chip stocks, including Nvidia, are trading in kind of the low to mid-20s, whereas Chinese chip stocks are usually trade at the high single digits. Thoughts on Intel and have you looked at the equivalent of the chip sector in China?
I haven't looked at the chip sector in China. I mean, I think, no, but one of the things I would check are the margins. I think, and the chip companies in the US have seen their margins surge as well. The Nvidia effect has started to ripple through the other chip companies, and it'll be interesting to see what the margins look like for Chinese chip companies. Maybe the business economics are different because they're selling to a different set of companies, and maybe the margins are lower. But I think, um, Intel's done things right in many ways since, um, since that shakeout, you know, 3 years ago. I think at that point, when I wrote about them, I said, "Intel's need to bring has to bring its ambitions down. It's no longer going to be king of the hill. That's done now." Because it got into trouble because it wanted to out-Nvidia Nvidia in the chip design business, and it wanted to out-TSMC in the foundry business, and it wasn't in a position to do either. It overspent. It crashed. And I think it's found itself with more of a niche portion of the market, and I think it's played the game really well. Does it deserve to triple over the? I don't think so. I mean, I am glad it did because I'm a shareholder, but I think that when you look at the run-up, clearly there's some, the, you know, there's some helium in this run-up. It's just being pushed up because, as I said, the sector is going up. You have only so many places you can put your money. Intel does have the advantage because of its US base, and, and I think that given how nationalistic policies have become around this, this AI space, I think Intel is benefiting from that perception of it being a US company, and you need US chips to maintain that protection.
So SpaceX, Anthropic, and OpenAI all expected to IPO, we think, at the end of this year sometime. At least it's, it's coming. The IPOs are coming. Um, and when they do, the combined market cap of those IPOs will exceed the combined market cap of every single IPO from the dot era. And also, it'll reach half of the IPO value from, uh, every single IPO put together from the 50 years before that. So, I mean, to me, it's like, this is, this is the big moment for the market, these three IPOs. I'd just like to get your views on how that will change the complexion of this market, how important they are, and also what you make of those IPOs themselves, these gigantic valuations for these companies that we don't really even know that much about, uh, OpenAI being a great example, I guess. What do you make of all three of them?
Not only will they exceed the IPOs that have ever been done, they exceed the market caps of entire regions of the world. I mean, that those three companies alone will be large in the market cap from 95% of the markets out there. Now, it's part of a, I think, a trend that's been building up over the last 20 years of companies staying private for longer, getting essentially the equivalent of public market investment. Fidelity is an investor in SpaceX, right? So you get the benefits of public market investment. You scale up while you're still a private business without any of the corporate governance constraints you might have as a public company. So my concern is these companies get so big as private businesses without any real pushback or oversight. It's only when they go public that you start to recognize what their weaknesses are. So the IPO part, I think will go fine. I mean, basically the excitement, if the mood of the market stays the way it is, well, these companies are going to go out there, get trillion-dollar market caps. And the aftermath, then, will be, once they become public companies, how will they deal with the earnings calls and the corporate governance challenges that will come with being public companies? And at that stage, I, you know, my concern with OpenAI, and, you know, we've talked about this before, is it's a corporate governance nightmare in terms of how the company is structured. I'm not even sure what the company will look like when it goes public, and I don't know whether the case that's winding its way through the courts will be resolved by then. That's going to be an issue, I think, in how the IPO gets priced. But I think that all three companies will have, in my view, and their offering will go fine. But in the aftermath, I think there'll be challenges that these companies will have to face. And then we'll figure out whether these companies are positioned to stay trillion-dollar companies or whether they'll see a fall back to more earthly levels in terms of market cap.
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We're back with ProfG Markets. What do you make of OpenAI's financials, or what little we know about OpenAI's financials, specifically? I mean, we know they $2 billion in revenue in a month, and so I guess $24 to $2 billion ARR currently. That number is often changing. Uh, they shot for $13 billion in revenue last year, projecting to burn $25 billion in 2026. Like, we know a little bit, but not that much. Have you looked into like OpenAI's financials? Do you have thoughts on it from a valuation perspective?
All of these companies, the financials are opaque. You get basically leaked numbers, and the problem with leaked numbers is these often paint the best possible picture. So if you're worried about the leaked numbers looking bad, they're leaked numbers. They should be the best of the numbers that are being leaked out there. I think that's the other thing that's going to come before the offering. The prospectuses are going to be out. I would encourage people to go through the prospectuses, not just in terms of income statements and balance sheets, but look through the footnotes because these are companies where you're going to see the start of trouble in the footnotes on, you know, the kind of employee stock that's been granted over time, who owns options in the company, when the, what'll happen to these options on off, on the offering. So I'm waiting for the SpaceX prospectuses, which might be the first to hit the market, because I am really interested in the details that we know nothing about for the moment. I think OpenAI's numbers, you know, at the moment, all we know are these, these numbers that essentially leak out here and there, and those leak numbers don't look great. That's, I mean, you're already seeing the comparison to Anthropic's numbers and saying those don't look as good. So maybe there are other things we will find out in the prospectuses that will affect how they get priced.
From a pure business fundamentals perspective, it seems to be a real question and a concern of, do these businesses even work? I mean, so far, I mean, OpenAI has a lot of usage. It's like a pretty ubiquitous product. Yes, it can grow some more, but they're still burning huge amounts of cash here. They're not expecting to hit a profit until 2030. And to your point, that's probably pretty optimistic. That's what they're saying internally. I just wonder if you have any thoughts on like AI as a business, cuz thus far, it, it, it's exciting. It's getting a lot of usage, but I'm not sure we can make the claim that it's been proven yet as an actual business.
I agree. I mean, I think that the place that's closest to showing some proof of working is in coding.
Yeah. Where you actually do see jobs being lost. Unfortunately, the way, you know, AI is working is the rest of the economy starts to feel the pain of layoffs. If you see Goldman Sachs operating with half of the manpower that they have today, we know AI is working, but we have another problem that we, we've got to deal with. So I think that right now, you're right, it's more, I mean, it's driven almost by anecdotal evidence right now, user evidence, which is, hey, I mean, I, you know, I, I'm on the mailing list for a lot of faculty emails that go back and forth, and everybody's talking about how they got a paper written by AI and how it worked out. And when the problem with anecdotal evidence is it's not the kind of evidence that can drive a business that requires actual proof that it delivers. It's those lower costs that thought it would. And that's what we don't know yet in much of the market, much of the economy. It's more promise than actual delivery for the moment. I think the promise is based on substance. I'm not going to, you know, I've seen some of the clawed, you know, business-specific applications. It's impressive what, what AI can do. So I'm not dismissing it, but I'm waiting to see what, how it actually plays out in the face of probably regulatory pushback and legal pushback, because much of this work requires courts and governments accept AI-generated work as the equivalent of person-generated work. And my, my feeling is that the tech people don't quite understand the resistance they're going to run into, because I've been in that space. It's incredibly inertia-bound, and it's not easy to replace traditional routes with new routes.
Sometimes I wonder, cuz I, I have these concerns generally. I mean, I, I think Scott and I are both very bullish on Anthropic. I'm bullish on AI as a concept, but I do have these underlying concerns about, does the business even make sense? And I sometimes wonder if I'm being like the guy in '99, 2000, who says, "Amazon's burning money. It doesn't work. It doesn't make sense." Like, cuz that was a real thing for a long time, and something that people were very worried about when it came to Amazon. I guess when you look at the, the comparison between, I guess, Amazon back then and e-commerce, and people saying the business model doesn't make sense, compared to today. Are there, are there equivalencies that you can draw? Is it, is that not really the right thing to be focusing on? Does the, do the fundamentals make sense right now?
I think with, with online, I mean, I can go back to the '90s and remember the value. The question was, will customers overcome their traditional patterns? Will customers actually move from going into stores and buying clothes and buying them online? It's an unknown, and clearly we underestimated how quickly customers would adapt to an online space. Older people took a little longer than younger people, but even they came around. Same thing with ridesharing. I remember the initial question with ridesharing is, somebody over the age of 50, will they actually call a car on their phone and be okay with it? They adapted very quickly. The question is, with businesses, which are the target tier, will the inertia be less or more? And I think it's going to vary depending on the business you're looking at. I mean, academia, I can tell you the inertia is going to be much greater simply because of the way in which academia has always responded. But if you look at, um, at different businesses, I, you know, my rule of thumb is the older the business, usually with older employees, it'll take longer for them to adapt. And the reason coding has been so quick to kind of move with AI is younger people, younger businesses. So, it'll be interesting to see if that hypothesis comes into play. If the resistance is greater in sectors that have been around a long time with more status quo, more established practices.
Three sort of headlines. I just love to get your quick responses to it, or in things in the news. The OpenAI must case.
It's a soap opera already. I mean, it's, in many ways, it's revealing sides to characters that I don't think they wanted revealed in public. So, but I think we're discovering that, I mean, as
We should always have known that these are human beings with their frailties, and you give a human being with frailty a billion dollars to play with, or two billion, or 5 billion, 50 billion, those frailties are going to get good. I think that I have no, I mean, this is one of those cases where I hope both sides lose. I don't want to see a winner because I don't think either side has the has the high ground because I think each has, I mean, I think Musk has a case that this started as a nonprofit and that Sam Altman kind of hijacked it, and so Sam Altman has a case that Musk probably would have converted the nonprofit into a for-profit at some point in time, and that he just preempted the move. But I think it'll be a soap opera that continues. We're going to learn some, you know, some more unsavory details about the people involved.
>> The current narrative, especially from the people who seem to understand these technologies the most, is that AI is going to bring about a job apocalypse, a labor destruction. Your thoughts?
>> That's a tough one. I think that, I mean, I've been reading a whole range of opinions on this. I know that there are people who point to the China disruption and what happened to me to labor and how the market adapted. I think that, um, that we do don't give, you know, the economies and people the the the as much credit as we should for being adaptable. I think they are more adaptable. I think there will be jobs lost. I think some sectors are going to be much worse affected. But the overall job effect might might be smaller than we think simply because new jobs, I I do believe that there will be new jobs created by AI. But I do think in the short term we have to start thinking about the sectors where the job losses are going to be greater and asking what next. No, maybe the kinds of people who be losing jobs will not be the kinds of people who will get a lot of sympathy because they've been, well, you know, they've been in well-paying jobs and given the history of job loss in the last go-round, people might say, well, it was coming and, you know, in a sense it was deserved for some sectors to kind of feel the pain that other sectors have felt.
And last one before we go to audience questions. The first apocalypse predicted was higher education at the hands of AI. You don't need higher education anymore that there's AI and yet applications are up and we continue to have margin power and have increased tuition faster than inflation yet again this year. Your thoughts on AI disrupting higher education.
I'm starting to think the apocalypse might come to the research side of education more than the teaching side, and maybe that will be the straw that breaks the back because we're discovering that so many of the papers that get published are so mechanical and rule-driven that AI can do it, and if the research side gets broken, it kind of breaks the the entire structure of higher education. At least in the US, we have people teaching only two or three classes and then giving the excuse, I write all these deeply impactful papers. So that's why I need the rest of the year off. So I'm looking at both the at the research side potentially as the breaking point for for academia because if the research side breaks, what excuse do you have for teaching only two, three classes and getting the seventh year off as a sabbatical? So I think maybe the the pain here will come in a very different pathway than the one that we've been told. Scott, you know, Scott and I have been talking about this for for a long time. The teaching side, the inertia, I think, is so great that it's very difficult to move. But the research side, I think the shock effect of turning out 50 AI-driven papers that match up to academic, every academic research paper is going to break the research side very quickly. God, I hadn't thought of it, and it can't come soon enough.
Ed, audience questions.
>> Uh, yes. Let's get into it. Claire Miller, our producer, has the questions. Cla, what do you have for us? What does Professor Deodaran think about banks offloading data center risk as reported by the FT on the 3rd of May? Is there a realistic way for these investments to pay off for the hyperscalers? For context, the FT reported that groups including JP Morgan Chase, Morgan Stanley, and SMBC are trying to find ways to distribute portions of data center related deals to a broader range of investors. Lenders are exploring private deals to sell stakes at in the debt as well as so-called risk transfers to reduce exposure to big borrowers and free up capacity for more lending. So, Oswalt, what do you think?
>> By itself, it makes sense, right? Because if you have a lot of debt to a particular segment of the economy, as a bank, you want to try to create some sharing of that risk. So, by itself, that doesn't bother me. But I think that it also means that if everybody's trying to do it at the same time, then the concern is what if there are people who don't want to share that risk? What if you just took on too much debt? And that's a potential problem for banks. I don't think it's going to break JP Morgan or it's, I think that if if you have a small bank that's overexposed to this kind of debt, then I'd worry. So maybe the regulators need to keep tabs on how much of the debt is going towards these data centers and figure out a way to look at banks that are overexposed. That that would still be my concern because the shuffling off is, I think, natural.
>> Next question. I am in the military and we constantly discuss China's preparation for invading Taiwan. The expectation is they will be prepared to take over Taiwan by 2027. It will more likely be 2029 or later. What do you expect a major event like that to do to the global economy? How about the effects on the AI industry? And how could we hedge against that event?
>> You can't. I mean, that that's that's the definition of a truly catastrophic event because I think that might be the expectation in segments of the military, but it's clearly not the expectation of the market. Because if that were the expectation, you'd see a very different market playing out now, not just in the US, but across the globe. But that would be an event where there's no hiding from. I mean, I don't see a, you know, any any any way around that.
>> That seems to me to be a great example that you talk about where markets aren't pricing in the catastrophic risk. And this is what we talked about last time. We've I've also had a conversation with Daniel Yergin who's one of the foremost historians on oil and his view is that there is a disconnect between what the physical oil traders feel about what's happening in the trade of Hormuz versus what the futures traders over on Wall Street feel about this issue. This to me seems like a great example. The military is very worried about this. The traders aren't. Why should we trust the traders?
>> Because the military, at least the the expectations people in the military don't have any money behind their expectations. Right? So in a sense, I always trust expectations that have money behind them over expectations that don't. I mean, it's part of the reason I think markets get trusted more than experts.
>> I'm going to combine these two from the audience. Could Professor Deodaran reflect on his comment a few months back about looking at collectibles and art as investments? Is he still exploring those vi as viable investments? And then second question, what percent would the professor recommend investors should hold right now?
The collectibles are not, I mean, I I hope people didn't, I think that they're clearly investments to think about, but I also think I said, do it only if you enjoy the art and the collectible you have. So if you don't like looking at paintings, don't buy paintings because you think they're a good part of your portfolio and hang them up around your house and cover them up because you don't like to look at them. Buy a painting because you enjoy it. Same thing with collectibles is, you know, whether it's baseball cards or, you know, if you truly enjoy collecting baseball cards and that's where you want to spend your time, go out and do it and add it to your portfolio and make it part of your investments. But if you're not informed in those spaces, just send your money out because it's a collectible investment. I mean, this these are investments with huge transaction costs, lot of leakages, and you're often trading with people who are more informed than you are. And that's always a recipe for danger. So I would be careful about that. On the on the question of how much cash is too much cash. I mean, I you know, Ed and I talked about how much, you know, the cash holdings I have in my portfolio last time. I was very clear I think about what I was doing. I was saying if I sell something now, I'm holding that cash as cash, not putting it back into the market right away. I'm not selling things to get cash. So to me, the minute you do that, you're entering into the market timing space, and the last couple of months, if nothing else, should have given us a warning why timing the market is so incredibly difficult to do. So I think that if you have a lot of cash coming in from something you've sold, then this might be the time you put it into treasuries and earn four or 4 and a half percent, a pretty decent return, and also then think in order in terms of when will you get back into the market because you leave it as cash, the danger is it stays as cash for a really long time.
I took what you said very seriously about when we asked you a few months ago, what sector was undervalued or where would you put some money? You responded for the first time I I heard you pause and like I could tell you were searching for a sector because everything feels so expensive and you brought up the notion of collectibles and based on that I've invested in this hedge fund called Nolan, which is my youngest who now takes the train out to conferences and he's been buying a crazy amount of Pokemon cards. This is entirely true. And he's super into it. He uses AI, uploads it, looks for ARB, goes to events, trades. Uh, anyways, uh, this is your fault. We are swimming in Pokemon cards here at the house. I'm curious, have you had any exposure to the Pokemon, uh, craze?
>> Absolutely. My kids all collected Pokemon cards. Unfortunately, we threw them all away when we moved. And I wonder how much money we ended up throwing into the into the trash can that day. But I think that's exactly the kind of example of collectibles is you truly enjoy a collectible class and you want to make it part of your portfolio. Do so. But don't go do looking for collectibles like you invest in stocks, right? Put it, you know, this is not a passive place to be.
>> All right. This is a perfect place to end. Would you characterize the markets as maturing in that they seem less volatile and reactive to daily insults or drama in the news? Is this a glimmer of hope for humanity?
>> If this is the glimmer of hope we're looking for, then we're in big trouble. I think I mean markets I think are like, you know, essentially they've been punched. They're like a boxer who's been punched so many times that they're not quite sure what's happening anymore. So I think in many ways this these markets are being driven by a very small subset of investors who are willing to put their money behind their bets because I mean they just at this point they they're just the shocks have been so many they just can't they they've stopped categorizing something that would have been a shock 10 years ago as a shock. So we've kind of reframed expectations as to what comprises really good news or really bad news, and that might be a problem in the future.
>> I just want to follow up on that and propose a thesis and that is the market values subscription revenues two to three X what it values transactional revenue. So if you own a company that makes it money getting people into a movie theater, uh, or retailer transactional, what have you done for me lately? Whereas if you have a company like Netflix that's subscription revenue, it trades at a much higher multiple. Do you think that maybe the markets have moved from transactional to subscription revenue? What do I mean by that? Now every year the amount of passive funds or the amount of capital and investments from stocks coming from passive ETFs and indices goes up, and effectively people invest through passively through 401ks and automatically. No one tries to time the market. It's not based on vibes. They just buy the whole market. Has effectively the market become a more durable means of capturing inflows because it's just passive and just money just flows in every month regardless of how people are feeling?
I think that is part of it. The other part I think is because, um, you know, because market flows based on market cap, many of the indices are market cap, it also feeds into momentum effects, which is if you're winning, you keep winning. But these things also turn the other way. If you're losing, you can also lose more. So for for at least for much of the last 15 years, momentum has been enough favor. So worry about when momentum changes, the same forces can push in the opposite direction. But the fact that money comes into these index funds does create more more predictability for the market, right? You don't have the institutional investors basically in Boston and New York deciding the market is overpriced. Let's pull all our money out. Institutional investors have basically lost control of the process. It's basically collections of not just individual investors, but non-traditional institutional investors pushing the market, and the rest of the institutional investors just going along for the ride.
As Demotian is the Kershner Family Chair in Finance Education and Professor of Finance at NYU Stern School of Business, where he teaches corporate finance and valuation. You can read his research on his blog, Musings on the Markets. Asworth, thank you for joining us today. This was a lot of fun. And to our audience, thank you for tuning in for the very first live stream. That was great. I would love to do it again. We will see you next time. Appreciate your time, Asworth.
>> Thank you.
>> Thank you for listening to Profy Markets from Profy Media. If you'd like to join our next live stream and sign up for our Substack at profgmedia.com.