Last week, investors dumped the hardware side of the AI trade.
And that’s in keeping with the same pattern that plays out over and over — each time a new technological paradigm emerges…
First, fortunes get made building the infrastructure. Then the infrastructure becomes the foundation for an entirely new generation of businesses.
Think about America’s interstate highways. There was enormous money in building the roads. But once they were there, an even larger economy emerged around the exits — restaurants, hotels, gas stations, shopping centers and businesses nobody needed before the highways existed.
AI is now in the midst of that same transition.
In today’s Moneyball Economics, I’ll show you what decades in Silicon Valley taught me about where technology profits migrate after the infrastructure gets built, why I think investors abandoned AI hardware too quickly, and which companies may be best positioned for the next phase.
Let’s dive in:
Video Transcript:
Welcome to Moneyball Economics. I’m your host, Andrew Zatlin. The topic today is what comes next for AI? To try and answer that, I’d like to share with you a perspective that I gained having spent decades as a veteran of Silicon Valley.
Let’s start with the selloff last week. Big selloff in the stock market, especially in the AI space, but there’s a little nuance here. Investors walked away from the hardware side of AI. They stuck with the services and application side of AI. And that’s because a lot of investors think we’re going to be repeating a very familiar pattern.
And that is when a new technology emerges, early on the money’s made on the hardware, but very rapidly, all the profits are really made on what that hardware enables, all the new services and applications. I think investors pull the trigger way too soon, but that perspective, well, it’s very valid because again, we’ve seen this pattern repeat time and time again since the internet emerged.
To understand the pattern and the perspective I want to share with you, think about the American highway system and the history of that system and what it created in our economy. Back in the ’50s, massive capital was spent building highways and there was a lot of money to be made. Very soon though, once the highways were built, the money wasn’t made on how you got from point A to point B. It was made on what you did on the off-ramps because people needed to eat and so they would pull over. Boom, McDonald’s as a restaurant chain soared.
People needed places to sleep. Boom, Marriott. All these hotels suddenly emerged. People needed to gas up, boom, gas stations soared. And then a new stage emerged not too long after that, and that was the time of the shopping center. Suddenly, off-ramps weren’t just something that you would go in and out of, they became destinations in and of themselves.
You had shopping centers where you would go watch movies, boom, movie chains emerged or you’d go shopping, big box stores emerged. You get the point. It’s not so much the highway where you still make money. You still have to expand the lanes, maintain the highways, but the real money is what you do leveraging that.
And that has been played out time and time again in the high tech space. For example, when the internet first emerged, what happened? You had huge demand for things like routers and switches, Cisco systems. You also had huge demand for the ports, tapping into the internet. So that meant computers, boom, Intel, Dell, HP, you name it.
But once you got past all this hardware deployment, Microsoft became the king of the mountain, right? You had all the services and all the applications and software making the money. And that was repeated again and again.
So for example, when the cloud emerged in the early 2000s and you had all this fiber optic cable, suddenly you had a company like Netflix come out and say, “I can stream video down there.” We don’t know all of the new services and technologies that are going to emerge from AI, but a couple things are pretty evident.
One is the big boys have massively deep pockets. And by big boys, I don’t mean the hardware companies, I mean the Amazons of the world, Facebook, Google, Apple. They can spread their bets very easily. And then when the winners start to emerge, they’ve got the deep pockets to buy them.
So you and I could try to figure out who the winners are going to be, who’s going to come up with the next technology, or we could just assume that we’re going to see a repeat of what we saw, for example, with Instagram.
Cool technology, boom, it’s bought by Facebook. I think that the winners here are going to be the winners who’ve been around for a while. I believe it’s going to be Google. I believe it’s going to be Facebook. I believe especially Amazon.
But whatever the case, there’s a lot of room here. I do think that investors are going to come limping back into the hardware side of things. I do think they sold off both prematurely and too deeply, but you can see that the valuations that were super huge for the hardware will now be going to the software services and application side. So spread your bets accordingly.
We are in it to win it … and we are going to win it.
Zatlin out.
