After recent warnings from “Big Short” investor Michael Burry, traders are now dissecting moves from other influential market players. Tech billionaire Peter Thiel’s hedge fund, for example, has sold its Nvidia stake, according to recent regulatory filings.
Add to that, comments from Alphabet CEO Sundar Pichai, who told the BBC in an interview that there are “elements of irrationality” in the market, adding that no company would be immune if the bubble bursts.
Despite the worrisome headlines, strategists at Goldman Sachs published a report last month, making the case that we are not yet in a full-blown bubble.
Here are 9 reasons why, according to the report:
1) Prices are rising because profits are rising
As Goldman noted, there is a difference between speculation and real earnings growth. And the big companies at the centre of the AI boom have so far been displaying profit power.
2) Rock-solid balance sheets in Silicon Valley
The report also points to the unusually strong financial health for big technology companies, not to mention low leverage. Cash, as they say, is king.
3) Self-funding massive AI capex with cash flow
Speaking of cash, Goldman makes a point of addressing capital expenditures and the fact that most of tech’s big bets are being paid for using free cash flow, not debt.
4) Valuations high but still below dot-com extremes (for now)
This one is, perhaps, where the debate is getting loudest. While Mag 7 stocks are certainly looking pricey, Goldman’s analysis suggests we’re not where we were during the dot-com boom.
Interestingly, Blackstone President Jon Gray made a similar point in a recent video published on the company’s website.
“Yes, valuations are full,” Gray stated. But this isn’t what we experienced in 2000, when the biggest market cap company Cisco traded at 130 times earnings.”
5) Investors aren’t demanding impossible growth rates yet
Goldman also explored other valuation metrics such as PEG ratios, which measure valuations compared to growth expectations. And it found that current estimates are still below the 1999-2000 peaks.
6) Big profits on every dollar invested
Earlier, we highlighted the power of profits. But beyond that, when you looked at Return on Equity (ROE), Goldman suggests record readings may help to justify some of the premiums being paid to invest in these companies.
7) Profitable incumbents are dominating, not speculative startups
We already referenced the cash piles big tech companies are using to fuel the AI boom.
Goldman argues that is a different scenario than having a swarm of new entrants spending other people’s money to build the future.
8) No frenzy of money-losing companies flooding the market yet
Perhaps building off the last point, Goldman says this would be classic bubble. And, for the most part so far, it’s missing.
9) Market concentration has been extreme before without crashing
Much has been said about the fact that only a few companies have come to dominate the S&P 500. But Goldman makes a point of highlighting other periods of high concentration that did not end in bubbles.
Jon Erlichman is a BNN Bloomberg contributor and the host of Ticker Take on YouTube.
