AI Stereotyping Justifies Shorting The QQQM ETF (NASDAQ:QQQM)

On this thesis, I cowl the Invesco NASDAQ 100 ETF (NASDAQ:QQQM) which has rallied by greater than 25% because the starting of this 12 months as proven under, however, it ought to achieve much more, pushed by Nvidia’s (NVDA) newest monetary outcomes. In distinction to present market enthusiasm, my goal is to justify shorting the ETF, particularly by questioning the rhetoric that AI has the potential to spice up tech’s income and profitability in a context the place stakeholders appear to be stereotyped.

To make my level, I’ll use the “stereotype” idea which has its roots in psychology, with an instance being gender stereotyping the place daughters had been beforehand given solely dolls to play with.

Nonetheless, with social and cultural evolution, issues have modified as seen within the picture above, however, stereotyping has made a comeback within the tech world considerably just like the tech bubble twenty years again.

Huge Bulletins and Dangers of Repackaging Previous Expertise with New Wordings

In reality, tech shares began to outperform when to compensate for sluggish income progress in Q2-FY2023 brought on by weak point in its cloud enterprise, Microsoft (MSFT) introduced its wager on generative AI. That was on January 24. Meta Labs (META) additionally adopted swimsuit with its inventory subsequently rallying greater than 100% year-to-date as proven under.

Worth traders had been additionally attracted when mega caps introduced tens of hundreds of jobs cuts, which usually augurs effectively for profitability. On this respect, one other use of AI is bettering the effectivity of company features together with eliminating sure again workplace features as per IBM’s (IBM) CEO.

The issue is that the majority are centered on the seen a part of the iceberg or what Microsoft is doing to beef up its Bing search engine with ChatGPT’s Generative AI. Nonetheless, if one takes the time to undergo earnings name transcripts, AI is meant to assist its cloud enterprise, by extra worth creation for Azure clients for every greenback they spend, whereas on the similar time, bettering the software program big competitors place and conferring it with extra pricing energy.

On this context, it have to be talked about that Microsoft already has an clever cloud section and that each Alphabet (GOOG) and Amazon (AMZN) additionally suggest AI companies as a part of their GCP and AWS infrastructures respectively.

Now, with ChatGPT there was a renewed curiosity in utilizing pure language for report-writing functions as you not need to be an knowledgeable with years of coaching to work with clever algorithms, and anybody can entry the device and see the advantages. In consequence, there was a variety of curiosity from companies in AI typically, however, the actual problem is to remodel pursuits into enterprise alternatives.

For this goal, some firms might repackage present merchandise which were round for years with Generative AI wordings to extend their attraction and benefit from individuals changing into stereotyped. An instance is Advice AI which is about finding out the profile of consumers to suggest merchandise which might be almost definitely to be chosen. This know-how has been round for years, utilized by some together with Alphabet and Tencent (OTCPK:TCEHY), however because it overlaps with the sentiment evaluation options that ChatGPT proposes, entrepreneurs will be tempted to model all new merchandise as Generative AI.

Thus, in all probability led by their advertising departments to point out that they aren’t left behind, there was a flurry of bulletins by the QQQM’s different holdings, including to AI stereotyping and feeding into Nvidia’s valuations.

Nvidia is the Epitome of AI stereotyping

Speaking processors for supporting AI workloads, there’s Nvidia with its A100 GPUs which drive OpenAI’s algorithms. Now, whether or not Microsoft succeeds in creating an AI-first cloud platform or not, Nvidia will certainly profit as extra computing energy will get added to Azure and to assist wider utilization of Bing. Different massive companies might also need to construct their very own non-public chatbots. Thus, the corporate expects second-quarter fiscal 2024 gross sales to be round $11 billion, or 53% above the $7.18 billion analysts had been anticipating.

Now, that is nice, however the query is whether or not it may be sustained after the preliminary frenzy of orders coming from clients who don’t need to miss the prepare. Additionally, does a 50% enhance in gross sales justify a trailing price-to-sales a number of that’s greater than 900% above the median for the semiconductor sector?

This wealthy valuation in a approach represents the epitome of AI stereotyping, as if solely Nvidia’s chips can drive clever algorithms. Nonetheless, it’s removed from having a monopoly standing as processors from Alphabet and Intel have additionally been discovered to be appropriate and even higher in sure cases by benchmarking organizations as I detailed in a current thesis.

Alongside the identical strains, Amazon doesn’t completely rely upon Nvidia, and, as the biggest public cloud supplier it has developed its personal purpose-built Trainium processors for deep studying. Additionally, with the introduced launch of two new language fashions supposed for patrons together with Bedrock, the hyperscaler is actually in a candy spot, however once more one must see returns earlier than investing.

Moreover, Alphabet has launched its Bard Conversational AI to compete with Microsoft, prompting individuals to show their consideration to the rivalry between the 2 giants, as an alternative of specializing in what worth add the know-how brings to the Google ecosystem or how the advert enterprise will carry out throughout an financial slowdown.

Noteworthily, in distinction to friends, Tesla (TSLA) and Broadcom (AVGO) haven’t made large bulletins however nonetheless have prospects. Now, as one in every of OpenAI’s main traders, Elon Musk’s firm has been utilizing machine studying to enhance the diploma of autonomy of its automobiles by prediction algorithms, and Broadcom shouldn’t be solely a semiconductor producer however has additionally diversified into the software program enterprise with its acquisition of CA Applied sciences and Symantec. In consequence, it presents a number of the monitoring and information safety options that may are available in demand as hackers use ChatGPT to enhance their capacity at committing cybercrime.

Now, there are actually a variety of prospects with a market anticipated to be value over $50 billion in 2028 from solely $11 billion this 12 months, however as per these two firms’ valuation grades of D, stereotyped traders appear to have already rewarded them greater than what’s doubtlessly achievable.

Buyers Oblivious of Regulatory Dangers

This enthusiasm primarily based on the preconceived concept that AI is not going to solely enhance income progress but additionally enhance profitability with out really seeing any signal of enchancment is unnecessary, however, worst, the market appears to not have priced within the issues.

For this matter, like most revolutionary applied sciences, ChatGPT additionally comes with issues, on this case, information privateness considerations, with some customers with the ability to entry others’ chats. As a brief measure, the developer OpenAI has tweaked its utility and disabled the historical past characteristic whereas a extra everlasting repair is discovered.

Now, this tweak addresses privateness considerations however, however, reduces the set of information from which ChatGPT can study. This in flip diminishes its efficacy, as AI functions typically will be envisioned as information guzzlers which feed on huge quantities of information to generate probably the most complete report.

Consequently, regulatory dangers pose an actual problem, far past the hundreds of thousands or billions of {dollars} that large tech are fined every so often by authorities within the U.S. and E.U. This will sap the urge for food for constructing massive AI platforms which may invariably digest all the buyer information at hand, in flip impacting demand for clever chips.

Unaware of these dangers, the market appears to have elevated tech mega caps which had been themselves beforehand thought to be dangerous and overpriced to protected haven standing throughout the banking disaster, on the again of AI. Therefore, QQQ’s holdings all gained greater than 10% throughout that interval, whereas, the Dow Jones index which holds shares of the extra conventional sectors of the financial system in together with vitality fell.

For this matter, QQQM has a Value-to-Earnings ratio of 25.08x and a price-to-cashflow of 15.41x. Evaluate this to the Power Choose Sector SPDR ETF (XLE) with a P/E of simply 10.55x, a P/CF of three.39x, and the dividends paid to shareholders to have an concept of the diploma to which tech is overvalued.

Now, the NASDAQ-100’s prime holdings aside from PepsiCo symbolize about 55% of its total weight. Due to this fact, contemplating that the ETF gained 25.45% YTD, 55% of this determine involves 14% (25.45 x 0.55).

Brief QQQM

Due to this fact, after a 25% rally, I estimate that the ETF can fall by about 14% which is the portion of the upside that may be attributed to AI stereotyping. Thus, by shorting QQQM, beneficial properties of $19 per share are attainable primarily based on the present inventory value of $136.43 falling to $117.33 (136.43 x 0.86).

Noteworthily, this represents solely a slight correction in contrast with the bursting of the Web bubble when between April 2000 and October 2002, the Nasdaq composite misplaced 740% of the 800% it had gained between 1995 and March 2000. At the moment, the know-how sector was in a very dangerous form as along with being overvalued, it was related to unsure monetary prospects, and conducive to disagreeable surprises, which isn’t the case immediately.

As for the timing, you could need to wait earlier than putting your wager as a pause by the U.S. Central Financial institution in early June might present catalysts for added upside.

Final however not least, there’s Apple (AAPL) which has kept away from making any large bulletins, however, proceeded extra rationally by promoting for a number of jobs particularly on the lookout for experience in Generative AI. Nonetheless, the market has rewarded the corporate with a 37% YTD achieve in all probability attributable to its wealthy gadget ecosystem used to entry AI functions. This reveals the excessive stage of expectations, however, I remind traders that in contrast to in 2020 throughout the Covid pandemic when digital transformation boosted tech earnings, there’s not more likely to be any AI revolution this time.