Latest / Best of Business / Sam Dickie: Fisher Funds expert on the growing concerns surrounding AI investments

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Sam Dickie: Fisher Funds expert on the growing concerns surrounding AI investments · Best of Business

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  Speaker 1: You're listening to a podcast from newstalk st B. Follow
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  Speaker 2: AI investments still on fire, but there is growing concern
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  Speaker 2: that it may be a bubble. And there's also a
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  Speaker 2: sense that maybe we're seeing a few things that are
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  Speaker 2: quite similar to the dot com boom bust, vendor financing,
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  Speaker 2: artificially inflated demand and so on. Sam Dickey from Fisher
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  Speaker 2: Funds is with us. He Sam, what exactly is vendor
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  Speaker 2: financing and why should investors care about this?
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  Speaker 3: Yeah, it's quite normal in many industries, so when suppliers
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  Speaker 3: lend money to customers specifically to buy their own products,
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  Speaker 3: essentially paying customers to be customers, And it's often used
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  Speaker 3: in small business sales or equipment sales when the buyers
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  Speaker 3: otherwise can't get credit easily. However, it is also used
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  Speaker 3: at big turning points in technology, when massive bold investment
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  Speaker 3: is required, and when suppliers start leading billions of dollars
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  Speaker 3: to customers so they can buy their own products. It's
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  Speaker 3: arguingly artificial demand, and history suggests we should stand up
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  Speaker 3: and pay attention.
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  Speaker 2: Now, how does today's AI vendor finance and compare to
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  Speaker 2: the dot com bubble.
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  Speaker 3: Some similarity. So in two thousand, let's use Lucent as
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  Speaker 3: the poster child. It made networking in telco equipment required
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  Speaker 3: for their early internet and mobile boom, and they and
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  Speaker 3: others were lending to large telcos but primarily small startup
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  Speaker 3: telcos and internet service providers to stoke demand for their product.
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  Speaker 3: And the thing was those small telco customers had were
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  Speaker 3: burning cash and had stretched balance sheets. Now today in Vidia,
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  Speaker 3: AMD and Oracle are funding customers like open Ai, the
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  Speaker 3: owner of ch GBT and Corwe who's a sort of
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  Speaker 3: data center provider, to buy their chips or space and
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  Speaker 3: their data center. So definitely some similarities. And for context,
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  Speaker 3: in two thousand, Loocent and Co leant around twenty five
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  Speaker 3: billion dollars, which was about one hundred and fifty percent
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  Speaker 3: of their earnings back then. Today the numbers greater than
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  Speaker 3: one hundred billion, but it's a smaller percentage of earnings
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  Speaker 3: because the balance sheets and cash flow generation of the
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  Speaker 3: companies today, both on the on the vendor side so
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  Speaker 3: in Video and Co, but also their big customers like
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  Speaker 3: Meter and Google are significantly healthier than Loosen to the
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  Speaker 3: startup customers, so it's not nearly as severe as two
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  Speaker 3: thousand yet, and at one point in two thousand, just
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  Speaker 3: for context, loosen wasn't even selling equipment anymore. It was
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  Speaker 3: just giving stuff away on credit and calling it a sale.
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  Speaker 3: So there was some fraud back then as well.
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  Speaker 2: Yeah, what are some of the warning signs that we're
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  Speaker 2: seeing today.
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  Speaker 3: I think it's apart from the circular nature of this
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  Speaker 3: the money merry go round, it's the sheer scale of
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  Speaker 3: the deal. So you and I talked last week about
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  Speaker 3: the staggering deal where open ai sign a contract to
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  Speaker 3: pay Oracle three hundred billion dollars over five years. Yet
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  Speaker 3: open ai itself only has fifteen billion dollars in revenue
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  Speaker 3: in total today and it just signed up to pay
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  Speaker 3: one of its supplies three hundred billion dollars. And the
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  Speaker 3: other one is AMD, which is sort of the big
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  Speaker 3: lagagadd or the poor Man's and Video they signed away
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  Speaker 3: ten percent of their equity to open Ai as a
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  Speaker 3: customer just so open Ai would buy lots of its
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  Speaker 3: chips so it could try and catch up to in video.
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  Speaker 3: And that. The final one to keep an eye on
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  Speaker 3: is the fact that a lot of the credit or
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  Speaker 3: the loans are being backed or collateralized by these same
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  Speaker 3: AI chips, which actually is quite reminiscent of how Loosens
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  Speaker 3: customers used overinflated telecom spectrum licenses back in the day.
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  Speaker 3: Is collateral for the debt? Right?
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  Speaker 2: Well, what does this mean to investors?
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  Speaker 3: No doubt that some frothy signs, and even today you
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  Speaker 3: saw the Bank of England and the IMF warning people
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  Speaker 3: about the risks of AI. What we don't know is
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  Speaker 3: how much longer this exuberance can continue for and for now,
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  Speaker 3: and this is important. The primary customers of these AI
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  Speaker 3: chips are companies with incredibly strong balance sheets and cash
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  Speaker 3: generation and that is quite different than two thousand. But
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  Speaker 3: we do need to keep an eye on this head.
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  Speaker 2: Yeah, interesting stuff, Sam, thank you very much. Appreciate it. Sam,
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  Speaker 2: Dickie Fisher funds.
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