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- [00:01]
A
Support for the show comes from Hostinger. Ever had an idea for a business or side hustle but never actually launched it? With Hostinger, you can turn that idea into something real in minutes instead of weeks. Hostinger is an all in one platform that brings everything into one place. Your domain, website, email marketing, AI tools and AI agents. You can create websites, online stores and custom apps with simple prompts. Then use AI agents to automate tedious tasks and grow your business. Go to hostinger.com theprovg to bring your ideas online for under $3 a month. Use promo code theprovg for an extra 20% off.
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Why send your docs in Oath share a PDF space for microbut. They'll understand. A custom intro that's so clear. An audio summary that says what they need to hear.
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A
An AI assistant that makes it all
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click so they'll understand it real good, real quick. Ain't just some files on the screen. It's exactly what your clients need to. You can do that, do that, do that, do that with Acrobat. Learn more@adobe.com do that with Acrobat.
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C
Support for the show comes from Amazon. There are the things you can plan for. A first birthday party, a movie marathon, a renter friendly bathroom reno. And then there are the things you can never plan for. A surprise rainstorm. A Blu Ray player calling it quits. Stick on tiles that looked way better on the package. For all things planned and unplanned, Amazon has you covered. You'll find low prices on everyday essentials and last minute lifesavers. Shop Amazon and save on essentials. Save the everyday.
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A
Today's number one 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. Listen to me. And Aswath's podcast and his spending all of his money on Uber, Deliveroo and Pokemon cards.
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D
Listen to me.
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A
Markets are bigger than us.
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D
What you have here is a structural
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B
change in the world distribution. Cash is trash. Stocks look pretty attractive. Something's going to break.
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D
Forget about it.
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A
Not a joke, just an observation. Just a little insight into my life. Ed, how are you?
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D
I'm doing well. Deliveroo. That's a name I forgot about. That's the English doordash. Actually the Australian door dash. Yeah, deliver it. What's the ordering? Wagamama, Nando. What are the hit? What are the hits?
- [02:35]
A
Oh my gosh. You're very in touch. If it were up to my son, he. 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, he goes strapped with a ton of cards and a few hundred pounds 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 manner of food from different restaurants and we'll get a bang at the door. And I open it and it's like code. And I'm like, oh no, it's for him. He orders his own food now and then I say, that's it, we are not paying for this. And he's like, you're not paying for it. I sold a gawacha card this morning. So anyways, his economic independence is. That's also getting in the way of my ability to discipline him.
- [03:38]
D
That's awesome. Good for him, running the hedge fund. That sounds great.
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A
Guess where I'm going tomorrow.
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D
Where are you going?
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A
I'm going to Poznan, Poland for a conference. It's a big deal. There's a huge conference there.
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D
What are you going to do there?
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A
Speaking for money. 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.
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D
They've been one of the, one of the real winners from the war. Straight. The stock market has been a real winner after the war, if I'm remembering that correctly. I mean, I think their stock market has ripped the last couple of years.
- [04:14]
A
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.
- [04:22]
D
Well, we have a big episode, an exciting episode to get into today. We are talking with Aswath to Modern 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. G Markets tour kicks off. We have a sold out show in San Francisco on May 27, 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, you can visit Prof. Gmarketstore.com to get your tickets. Now that is Prof. Gmarketstore.com 12 days link is in the description. And with that, let's get into our episode. Welcome to our first ever Prof. G Markets Livestream. 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 Aswath de Modorin. 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 Demoderan 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 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 Demoderan, the Kirchner family Chair in Finance Education and Professor of Finance at New York University Stern School of Business. Professor Demoderan, thank you so much for joining us again. We're so excited to get your update. Let's just start very broad here. I look at the S and 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 first quarter that we've seen here, what has struck you about the markets that we're seeing in 2026?
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B
The resilience. I mean, I think that 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. 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've 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 starting in March when we entered this new crisis with the conflict in Iran, I actually started estimating what's called an equity risk premium, the price of risk in the market. It's a temperature gauge for the market. And what astonished me in March, at the height 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's thrown at them and come out on the other side int and on 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.
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D
When you look at the conflict 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 going to get a deal, we're not going to get a deal, et cetera. It keeps on 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?
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B
I think at the moment, if all that happens is gas prices stay at 450 or 5, the market I think is okay with that. I think the catastrophic risk here is not that 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 in many ways what the market seems to be building in is the economy can survive with gas prices being 450 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 three months ago, but it's okay. But I think 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 happens to earnings now? And I think that's the part of the story that I find 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 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 have been able to deliver on earnings even in the midst of crises 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 the real damage being created. Earnings. And up to now we're not seeing the damage show up in forecasts.
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A
Aswath, good to see you. I've never seen, 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?
- [11:44]
B
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 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 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. These companies are still money burning machines. I think the question is when 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.
- [12:38]
A
So you recently you published a 2 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 revenues growing, 8 billion in EBITDA growing I think 24% a year. And then I look at Anthropic and I understand it probably doesn't have the same moats as the SpaceX, but I look at Anthropic which has jumped to 30 and I think it's headed towards 40 billion in ARR and it looks as if it might 10x again. It's been 10xing every year. Why would Space X be worth 1.2 trillion in your mind and Anthropic be only worth 1 trillion? Discern how you value each of those sectors.
- [13:24]
B
I think 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 in two of its three business lines clear motes. I'm not as impressed with the Xai part of SpaceX as some people are. For some people that's the excitement factor because you can throw the trillions of dollars around much more easily. But if you look at the space launch business 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 think 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 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.
- [14:56]
A
Taking the aperture Back I heard a very interesting 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 just greater risk to all future cash flows amongst the companies that have traditionally traded at the highest multiples?
- [15:34]
B
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 company stopped in your 5 or 10 said forever and then use 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 was. We don't know what the market is already building in before AI came along. We kind of try to reverse engineer it. But I think that with AI, those, those assumptions about how long companies will last will have to come, 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
- [16:44]
D
the pricing, just going back as to the general 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. And so when we look back at what's happened here, 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. 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 actually not as durable as perhaps we might think?
- [17:55]
B
I think that for the companies building the architecture of AI, you're absolutely right. The Nvidia companies. Nvidia and the chip companies clearly benefit from the building. But for most of the other tech companies, AI has been an expense rather than an income stream. So you take the rest of the Mag 7. It's true on the cloud business you're benefiting a little bit bit from AI, but you look at how much they're spending on AI, even if you just count the depreciation part of their capex, that by itself is putting downward pressure on earnings rather than upward pressure. So I think AI is a big part of the growth story. It's still not a big part of the collective earnings story. It might be a big part of the earnings story for some companies, but if you look across The S&P 500 and look at the earnings, 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.
- [19:01]
D
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 Prof. G Marketstore.com.
- [19:20]
A
Support for the show comes from Zbiotics Zebiotics Pre Alcohol Probiotic Drink is the world's first genetically engineered probiotic. It was invented by PhD scientists to tackle rough mornings after drinking. Here's how it works. When you drink, alcohol gets converted into a toxic byproduct in the gut. It's a buildup of this byproduct, not dehydration. That's to blame for rough days after drinking. Pre alcohol produces an enzyme to break this byproduct down. Just remember to make pre alcohol your first drink of the night. Drink responsibly and you'll feel your best tomorrow. So I have been using zebiotics even before they were an advertiser. If I know I'm gonna drink, I take a zebiotic and I found that on average it takes away about a third of the yuck the next morning if you will. So for me that's absolutely worth it. May is packed with back to back reasons to be out. Don't Let a rough morning after keep you on the sidelines. Drink pre alcohol to stay ahead of it and make the most of every Saturday this month. Go to zebiotics.com profg to learn more and get 15% off your first order when you use Profg at checkout. Zebiotics is backed with 100% money back guarantee, so if you're unsatisfied for any reason, they'll refund your money, no questions asked. Remember to head to zebiotics.com Prof. G and use the code Profg at checkout for 15% off. Support for the show comes from Laradin Executives are being asked to justify AI spend, manage risk and show ROI, often without the right visibility. CFOs and CIOs are basically being told make AI pay off and do so safely. The real challenge right now isn't adopting AI, it's understanding how it's being used and how to maximize the value from AI. That's exactly what Laradin is focused on. So look, I use AI all the time. I have a second screen, it's always up. It just has my LLMs on it. And if I get health information, if I get a PowerPoint deck, a board deck, I upload it and I start asking questions. And I believe that everybody needs to be somewhat facile with AI. Laradin is an AI impact intelligence platform designed to help organizations understand how AI tools are actually being used, whether there are opportunities to get more out of AI and the value AI initiatives deliver. Instead of just counting logins or installations, it tracks real utilization, proficiency, governance and impact, the metrics that matter when enterprises scale AI. As you integrate new AI, Laradin gives you visibility where it counts the most. If AI is already part of your organization, now's the moment to get control of it. Head to laradin.com today and book a demo to start. Maximum Maximizing Impact from AI.
- [21:59]
C
Support for the show comes from Amazon. There are the things you can plan for a first birthday party, a movie marathon, a renter friendly bathroom reno. And then there are the things you can never plan for A surprise rainstorm, a Blu Ray player calling it quits. Stick on tiles that looked way better on the package for all things planned and unplanned, Amazon has you covered. You'll find low prices on everyday essentials and last minute lifesavers. Shop Amazon and save on Essentials. Save the everyday.
- [22:41]
D
We're back with Profg Markets. Just going to I saw a pretty incredible chart 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 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%. 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. A lot of people are quite concerned about this and feel that maybe again this is an indication that the revenue in the AI story isn't necessarily real or, or that were kind of recycling the revenue that the VCs and the Nvidias gave to OpenAI Anthropic 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.
- [24:01]
B
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 them, without the AI spending, we'd probably be looking at GDP growth, I don't know, in the negative. We'd very quickly start to push towards recession level growth. So I think that 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 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, they'll be writing offs. Now when I wrote about Tim Cook stepping down, one of the points I made is the other. The rest of the Mag 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, you look at the concentration of market cap in companies. There's also concentration in earnings coming 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.
- [25:59]
D
When people talk about 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 I personally am starting to feel a little worried about that myself. Again, I wonder if you feel the same way.
- [26:46]
B
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 correct, 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 online activity. So this time around, I think the macroeconomic costs are going to be greater from a correction because this is carrying the macro economy 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, 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.
- [28:24]
D
In other words, it will be worse,
- [28:26]
B
it'll be more widespread, it'll be more market wide. 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 will take a little longer to get through.
- [28:42]
D
When we last spoke, we were discussing some of the more systemic risks to the markets. We were discussing, I think we were talking about the war. We were talking about potentially the AI story losing its momentum. I think we're also maybe talking about national debt which also we could get into. It just surpassed 100% in the US for the first time since the end of the Second World War. Where do they rank for you when you think about how this market, if it were to unravel in a certain way? Which one to you at this point is front of mind? Most likely the most relevant.
- [29:22]
B
The war is the 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, it's not working. So one of the problems 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 show up. 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 Japan has 180% of GDP 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 war or the AI breakdown creates an economic shrinkage which then makes the debt into an even bigger problem.
- [30:59]
A
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 and P as we sit here today at 17%, my understanding is the entire sector as a whole is up 60% in just the last couple of 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?
- [31:47]
B
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. So I think part of the expense 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 chips out there. I think that to me, the bulk of 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 of buildup that happened. But I think much of the reason I've succeeded has 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 be. 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 that chip demand is so intense that everybody can share in the spoils now, not just the one or two winners that the market was identifying.
- [33:09]
A
Well, so just to double click on that one, love to get your views on intel after year to date. It's tripled and over the past year it's up 6x. What you think of intel right now. And also I was looking at Chinese chip stocks. So our chip stocks, Intel's trading at 120 times earnings or something. But a lot of the chip stocks, including Nvidia, are trading in 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?
- [33:52]
B
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 chip companies in the US have seen their margins surge as well. The Nvidia effect has started to ripple through the other chip companies. I'd be interested to see what the margins look like for Chinese chip companies. Maybe their business economics are different because they're selling to a, a different set of companies and maybe the margins are lower. But I think Intel's done things right in many ways since that shakeout three years ago. I think at that point when I wrote about them, I said intel 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 and the chip design business and it wanted to out TSMC in the foundry business. And it wasn't in 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, 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 I think that given how nationalistic policies have become around 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.
- [35:38]
D
So SpaceX anthropic and OpenAI all expected to IPO. We think at the end of this year sometime, at least it's coming. The IPOs are coming and when they do, the combined market cap of those IPOs will exceed the combined market cap of every single ipo from the.com era and also it'll reach half of the IPO value from every single IPO put together from the 50 years before that. So I mean, to me, it's like this is the big moment for the market. These three IPOs. I 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. OpenAI being a great example, I guess. What do you make of all three of them?
- [36:38]
B
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, those three companies alone will be large in the market cap from 95% of the markets out there now. It's part of, 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 excitement if the mood of the market stays the way it is. Well, these companies are going to go out, they 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, my concern with OpenAI, and 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 wending 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, 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 what these companies are positioned to stay trillion dollar companies or whether they'll see a fallback to more earthly levels in terms of market cap.
- [38:44]
D
We'll be right back and for even more markets content. Sign up for our newsletter@prof.gmarkets.com.
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A
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This is a job for Indeed Sponsored Jobs. 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 $25 billion ARR. Currently that number is often changing. They shot for $13 billion in revenue last year, projecting to burn 25 billion in 2026. We know a little bit, but not that much. Have you looked into OpenAI's financials? Do you have thoughts on it? From a valuation perspective, all of these
- [41:08]
B
companies, the financials are opaque. You get basically leaked numbers. And the problem with leak numbers is these often paint the best possible picture. So if you're worried about the leak numbers looking bad, their leak 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 prospectus, 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 the kind of employee stock that's been granted over time. Who owns options in the company? What will happen into these options on the offering? So I'm waiting for the SpaceX prospectus, 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 at the moment, all we know are these numbers that essentially leak out here and there and those leak numbers don't look great. I mean, you're already seeing the comparison to anthropics numbers and saying those don't look as good. So maybe there are other things we will find out in the prospectus that will affect how they get priced.
- [42:28]
D
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 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, because thus far 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.
- [43:13]
B
I agree. I mean, I think that the place it's closest to showing some proof of working is encoding, 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. Problem with anecdotal evidence is it's not the kind of evidence that can drive a business that requires actual proof that it delivers 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. And I've seen some of the Claude business specific application. It's impressive what AI can do. So I'm not dismissing it, but I'm waiting to see 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 feeling is, 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.
- [45:06]
D
Sometimes I wonder because I have these concerns generally. I mean, 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, and I sometimes wonder if I'm being like the guy in 992000 who says Amazon's burning money. It doesn't work. It doesn't make sense because 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 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 equivalencies that you can draw? Is that not really the right thing to be focusing on? Do the fundamentals make sense right now?
- [45:54]
B
I think 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 lot of a little longer than younger people, but even they came around. Same thing with ride sharing. I remember the initial question with ride sharing 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 here, 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 is always responded. But if you look at different business, 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.
- [47:17]
A
Three sort of headlines. I'd just love to get your quick responses to it or things in the news. The OpenAI must case.
- [47:23]
B
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. 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, a 2 billion, a 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 high ground because I think the. 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 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 more unsavory details about the people involved.
- [48:24]
A
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?
- [48:34]
B
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, and what happened to labor and how the market adapted. I think that we don't give the economies and people 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 job. 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? Maybe the kinds of people will be losing jobs will not be the kinds of people who will get a lot of sympathy because they've been in well paying jobs. And given the history of job loss in the last go around, people might say, well, it was coming and in a sense it was deserved for some sectors to kind of feel the pain that other sectors have felt.
- [49:50]
A
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 fast and inflation yet again this year. Your thoughts on AI disrupting higher education.
- [50:08]
B
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 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 impacted full papers. So that's why I need the rest of the year off. So I'm looking at both at the research side potentially as the breaking point for academia. Because if the research side breaks, what excuse do you have for teach only two, three classes and get the seventh year off as a sabbatical? So I think maybe the pain here will come in a very different pathway than the one that we've been told. Scott and I have been talking about this for a long time. The teaching side, the inertia I think is so great that it's very difficult to move. But research side, I think the shock effect of churning out 50 AI driven papers that match up to academic every academic research paper is going to break the research side very quickly.
- [51:25]
A
God, I hadn't thought of it and I can't come soon enough.
- [51:27]
D
Ed, audience questions yes, let's get into it. Claire Miller, our producer, has the questions. Claire, what do you have for us?
- [51:34]
E
What does Professor Demoterin think about Bank's offloading data center risk as reported by the FT on 3 May? Is there a realistic way for these investments to pay off for the hyperscalers? For context, the FT reported that groups including JPMorgan 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 in the debt as well as so called risk transfers to reduce exposure to big borrowers and free up capacity for more lending. So Aswath, what do you think?
- [52:12]
B
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? Debt that's a potential problem for banks. I don't think it's going to break JP Morgan or I think that 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 would still be my concern because the shuffling off is I think natural strong.
- [53:06]
E
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?
- [53:29]
B
You can't. I mean that, that 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 U.S. but across the globe. But that would be an event where there's no hiding from. I don't see any way around that.
- [53:57]
D
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. I've also had a conversation with Daniel Jurgen 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 Strait 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?
- [54:28]
B
Because the military, at least the expectations. People in the military don't have any money behind their expectations. Right. So in a sense, I always trust expectations that are money behind them over expectations that don't. I mean, it's part of the reason I think markets get trusted more than experts.
- [54:44]
E
I'm going to combine these two from the audience. Could Professor Demoterin reflect on his comment a few months back about looking at collectibles and art as investments? Is he still exploring those as viable investments? And then second question, what percent cash would the professor recommend investors should hold?
- [55:02]
B
Right now, the collectibles are not. I mean, I hope people didn't mind. 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 paint 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 as a collectible investment, I mean, these are investments with huge transactions 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 question of how much cash is too much cash, I mean, Ed and I talked about how 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 instead of 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 4 or 4.5% a pretty decent return. And also then think 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. Time.
- [56:55]
A
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 heard you pause and 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, Uses AI, uploads it, looks for arb, goes to events, trades. Anyways, this is your fault. We are swimming in Pokemon cards here at the house Aswath. I'm curious, have you had any exposure to the Pokemon craze?
- [57:46]
B
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 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 doing looking for collectibles like you invest in stocks. Right? Put it, you know, this is not a passive place to be, all right?
- [58:15]
E
This is a perfect place to end. Would you characterize the markets as maturing and that they seem less volatile and reactive to daily insults or drama in the news? Is this a glimmer of hope for humanity?
- [58:29]
B
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, 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 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're just. At this point, the shocks have been so many, they just can't. 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.
- [59:15]
A
I just want to follow up on that and Propose a thesis. And that is the market values subscription revenues 2 to 3x what it values transactional revenues. So if you own a company that makes its money getting people into a movie theater or retail or transactional, what have you done for me lately? Whereas if you have a company like Netflix that 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.
- [60:15]
B
I think that is part of it. The other part I think is 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 at least for much of the last 15 years, momentum has been enough favorite. 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 predictability for the market. 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 but non traditional institutional investors pushing the market and the rest of the institutional investors just going along for the ride.
- [61:16]
D
Aswath to Modern is the Kirchner 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. Aswath, 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. Aswath thanks Aswath.
- [61:43]
B
Thank you.
- [61:46]
D
This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Shalon, Isabella Kinsel, Kristen O' Donoghue and Mia Silverio. Jake McPherson is our social producer, Drew Burrows is our technical director and Catholic Dylan is our executive producer. Thank you for listening to Profg Markets from Profgy Media. If you'd like to join our next live stream and sign up for our substack@profgmedia.com.
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