Podcast Episode #11
Hello, investors and market watchers. Welcome to episode 11 of the tax free millionaires podcast. I'm your host, Reed Scott. And today we're diving deep into one of the most exciting and potentially dangerous market phenomena of our time, the AI stock market boom. We'll take a critical look at how this current wave of technological euphoria compares to some of the most infamous market bubbles in recent history.
But more importantly, We aren't just going to speculate whether the market will go up or down. We're going to show you how to take advantage of the market, increase your wealth, and not lose sleep over whether there is an impending market meltdown or not on the horizon. Let's compare the current AI boom to past AI boom.
Cycles of boom and bust. So the AI boom we're witnessing is unprecedented. Companies like Nvidia, Microsoft, and Google are seeing astronomical stock price increases driven by the promise of artificial intelligence, transforming every sector of the economy. Market caps are soaring. Venture capital is pouring in and investors are experiencing a serious case of FOMO, fear of missing out.
Comparing the AI boom to previous boom and bust cycles, there are some similarities and differences. Let's talk about what they are. So, similar technological excitement occurred in the dot com era. Just like in dot com era, we are now seeing unbridled enthusiasm about a transformative technology.
In the late 1990s, it was the internet. Today, it's artificial intelligence. We're also seeing speculative investments. Both periods share a common thread of investors throwing money at anything with a dot com in it, and today it's AI and many times investors are not doing their due diligence.
Overvaluation. Companies are being valued based on potential rather than current performance. So even though many of the companies today are making money and they weren't in the dot com era, We still have a, a bit of overvaluation going on in today's market. Some people would say it's an incredible amount of overvaluation.
Some would say it's not that much at all. But I think everyone would agree that the market is highly valued. Is it a carbon copy of the dot com playbook? No, and here's why. Technological maturity. Unlike the dot com bubble, AI isn't just a theoretical concept. We're seeing real tangible applications across industries, from healthcare, to finance, to manufacturing.
And there are established players. The current boom is being driven by big tech giants like Microsoft, NVIDIA, Amazon, Google , AMD, other big profitable companies with proven business models and massive cash reserves. They're not just startups with flashy websites and a pitch deck. There is actual revenue generation.
Many AI companies are already generating substantial revenue. Unlike many. com companies that were essentially sophisticated PowerPoint presentations. I was around in Northern California and San Francisco in the. com era. And you may have not heard of companies like commerce one or Arriba. These were huge companies with 5, 000 employees or more each with huge campuses with many buildings.
And I was president of a smaller technology company and I was trying to beat down the door to get into these companies to get their business. Well, they eventually disappeared and no one has heard of those companies today. They hired all these people and built these campuses without one dime of profit or in some cases no revenue even.
Because they were highly financed by venture capitalists. So there are some commonalities between the dot com boom and the AI boom in terms of market exuberance. There's a big difference, however, because in the dot com era, there was no revenue yet and certainly no profits. Many of the dot com companies just no longer existed.
They last for only a few years. I have lots of stories about some of the incredible launch parties I used to go to in the late 90s before the boom. I remember I went to one party in Boston. There were magicians in the hallways between rooms. There was a tortionist who came out of a small box. Many of the companies you have never heard of.
They lasted just a few years, but they had millions of dollars of venture capital to put on these huge promotional events. Now. Let's take a look at today's companies. I'm sure you've heard of companies like Nvidia, Google, Microsoft, Amazon, AMD, Micron, of course you have. They've all been beating revenue and profit projections because of heavy investments in AI from companies like Oracle, Salesforce, SAP, who have to spend money to enhance their existing software platforms to incorporate AI.
If they don't, they will be out of business. And not just that, that's not the only reason they're spending money on AI. It is actually.
So let's look at a detailed comparative financial analysis in the dot com era. Most dot com companies were pre revenue in 1999, only 14 percent of internet companies were profitable. The average annual losses were 30 to 50 million per year of each company. The valuations were based purely on potential, not actual earnings.
In the current AI boom, the financials are completely different. N Nevada's net income in 2022 was 4.4 billion. In 2023, it was 29.8 billion, a 679% increase in net profit. Microsoft's AI revenues are growing at 40 to 50% annually. Google's AI related services generating additional billions in new real revenue, and I don't believe that Google has even begun to scratch the surface because if they are successful with their willow chip.
It is beyond belief what the evaluation will be. So we're looking at , contrasting concrete earnings versus specular potential. And so when I mentioned Willow, that's not necessarily AI because it's quantum computing, but they are related, I believe. We'll talk more about that in a minute. So the comparison evaluation perspectives of today's AI boom to the dot com era are just, there's no comparison.
The The other thing that might be similar is that in the dot com era, we had PE ratios that were out of sync because there were no earnings in the first place. So today's financial analysts are saying, well, the PE ratios are also overvalued, but at least they're based on earnings. Now they may be more forward thinking than we're like, because a PE ratio, remember a PE ratio is backward looking.
I mean, it looks at the. Earnings in the past to project what the company should be. But many people are valuing these companies, not just on their actual earnings, but what they believe the potential is in the future. Now that could lead to overvaluation but it's not quite the same as what happened in the dot com era, is it?
Because we had no earnings to base a P earning ratio on. So here's another difference in the dot com versus the AI boom. Okay. AI market projections are projecting it to reach a value of 1. 8 trillion by 2030. In other words, companies will be spending 1. 8 trillion on AI technologies. Now, the potential productivity gains from that spend is 15.
7 trillion globally. In a enterprise AI adoption by companies, as I mentioned earlier, like Salesforce and HubSpot and SAP, Microsoft. Incorporating things into their products at a rate of 50 to 70 percent efficiency improvements while they're incorporating AI. This is huge. It's going to change the nature.
It already is changing the nature of how we work in my own company. I am developing tax free millionaires, online educational system where we have Courses where people can learn how to invest in the stock market, actively manage their own investments and, and get consistent double digit annual returns , our customer service chat bot is AI driven.
We have built a knowledge base of all of our courses, all of our technologies into Cognos, the name of our AI chat bot. And you could ask a question and get an intelligent answer to it. Instantly, based on the fact that our entire knowledge base is uploaded in the system. It's an incredible value and answers 95 percent of customer service related questions without human intervention.
And most companies are already doing that. If they aren't, they're going to be at a competitive disadvantage. Some of the risk factors. So Thank you. Our risk mitigation factors, there are really structural differences from previous bubbles. Today we have companies with strong balance sheets, diversified revenue streams, established technology infrastructure, and a regulatory framework that has evolved with technology.
There are some big differences between earnings, growth trajectories, and moats around the technology. For instance NVIDIA has a dominant market position in AI chips. They have 80 percent of the market share in AI training software and projected continued technological leadership. They are spending over 10 billion a year on R and D investments related to AI.
Now, does that mean the NVIDIA will maintain that strong market dominance? It's hard to say. There are many people saying that companies like Amazon and Microsoft and Google are developing their own AI chips and that will, they won't need NVIDIA. But remember this, NVIDIA built their technological dominance over a period of two decades in the gaming market.
And they have a big advantage technologically. So even a big company like Microsoft and Google who can spend billions per year to catch up, even if they caught up with NVIDIA's technology and their their platform, their architecture, Are they going to be instantly able to manufacture like NVIDIA does?
I don't think so, because it takes a while to be able to manufacture a new technology. So, it is true that NVIDIA may lose their dominance, but that doesn't mean that the AI boom is over, it just means you may have to find another stock to invest in other than NVIDIA. So, what are some of the potential risks in AI?
So even though I believe it's, there's a big difference between the com Boom, bus, psycho, and AI. Does that mean it's safe? You can just blindly invest in anything related to AI , the answer is always no because despite the differences, no market boom is without risk.
There are always overhyped expectations. Not every AI company will deliver on its promises. There are regulatory challenges. Governments are still figuring out how to regulate AI technologies. You may have heard that President Trump. When his incoming administration eliminated the previous executive order by president Biden, president Biden had said any companies developing AI have to report to the government about that technology and let them know what's going on.
And president Trump said, no more, you don't have to report to us. So they've eliminated some of the technological barriers. Is that good or bad? Don't know. I'm just telling you that the regulatory environment is constantly changing. There are technological limitations. Current AI may not be able to live up to the most extreme predictions because the challenge of AI is that it needs ever increasing processing power,
these large language models have to mine tremendous amounts of data. And that's why these companies are building out ever increasing large data centers. And some of the problems are. As you back more and more power on the silicone chips, , they run hotter. And when they run out or they need more cooling.
So the SMCI, by the way, was a company that was making a fortune providing a rack and cooling systems for data centers. And they've had a setback for a number of reasons, not necessarily related to their technology, but you won't be able to cool some of these future AI chips with air. You're going to need a liquid cooling.
There are companies that we've talked about in previous episodes that do that, which may mean there's a shift in where your investment opportunities lie. So there are obviously energy restrictions. You need ever increasing amounts of energy to power these huge data centers. And some companies like Microsoft just entered into a a Partnership agreement with a large utility in the East to buy energy for their data center, but they also invested in another company which provides uninterrupted energy backup called Blue Energy.
And we also are going to probably see small modular reactors, small nuclear reactors be a source of energy. Off the grid power for some of these huge data centers because they can be built elsewhere, brought to a site. They don't need to be on the grid. So there's just a lot of opportunities in AI, but they're also, they're obstacles because you need power, you need a cooling, you need the data centers built out and will they hit the wall and how much power you can pack onto a chip possibility.
Now, what's another limitation? Well, you could have interference, geopolitical interference from bad actors. Semiconductor supply chain is very vulnerable. Taiwan's Taiwan has semiconductor manufacturing dominance. TSMC, Taiwan Semiconductor Manufacturing Company, controls 53 percent of global semiconductor foundry market and produces 90 percent of advanced chips in the world.
that are supplied to companies like NVIDIA, Apple, and AMD and Qualcomm for AI development. The potential impact of China invading Taiwan or trying to take control of Taiwan could cause an immediate market disruption, could reduce semiconductor production. by half or completely halted, which would cause a 40 to 50 percent global chip supply interruption.
And it estimated 1. 6 trillion of potential economic damage and could take 3 to 5 years to get back up to full production at a very optimistic. That's assuming the government's all acted together to try and solve the problem, which is unlikely. So there are semiconductor supply chains, vulnerabilities that could stop the A.
I. Boom. And this has market and economic implications. 20 to 30 percent of semiconductor industry value could collapse. Development could slow down, which you can't get to chips. And that could affect production and technological improvements globally. Now, some things are already being done to mitigate these risk factors.
The United States has increased investment in alternative manufacturing in the United States. They've talked about strategic stockpiling of critical semi conductive components, which in my opinion is going to be less effective because if you're stockpiling silicon chips, they could be so far behind by the time you need it, I mean, they'd be worthless.
Now let's talk about a different risk factor , unrelated to AI's profitability that also could be an issue, and that is a financial crisis meltdown. Now we had a financial crisis meltdown in 2008, a 2008 recession was fundamentally about systemic financial risk and bad lending practice in a housing market collapse.
What's that got to do with AI . Well, the problem is something that huge will have an impact on the stock market just as it did in 2008. So the housing market collapse, lending collapse, mortgage collapse, and sort of the stock market. Now, even though you had profitable companies, I remember at this time, Very profitable companies lost two thirds of the value.
General Electric was a profitable company at the time, they were worth 40, they went down to 9. And I made money off of that because I realized that was a tremendous value. But the point is, if you're not protected, if you're not managing your risk, a meltdown in one market could impact the AI boom.
, another risk factor, unrelated to AI's profitability, besides the financial market meltdown, is, besides the financial market meltdown, And somewhat related is we could have a cryptocurrency meltdown in, this is my opinion and take it for what it's worth, but when we look at the AI boom, and you also have another boom in cryptocurrency, and to me they're totally different, the AI companies have intrinsic value, they're increasing productivity, they are adding value to the economy, I'm not so sure that cryptocurrency is doing that, and it isn't.
A lot of speculation. I know Bitcoin or at least ether technology is talking about improving processing power of transactions by decentralizing and sharing processing across multiple locations, but to this point in time, they still haven't been able to process transactions faster than a centralized computer through visa for financial tracks, transactions in the cloud.
There is also a risk that quantum computing . could completely eliminate the value of cryptocurrency because quantum computing can solve problems so quickly and I was listening to a scientist in the quantum field talk about this last month at some point in the future when the algorithms develop and the quantum technology develops he said he would be able to basically Break all the cryptocurrencies and take it all, steal it all, all the global currencies in five minutes.
Now whether he was exaggerating or not, I don't know, but it's an interesting question because what happens to the cryptocurrency market in that scenario? What happens if the speculative, now there is a lot of speculation in cryptocurrency. I think most people, even people who have made money in cryptocurrency would agree with that.
Whether they see value in their particular crypto current coin or not. There are some mean coins that are absolutely worthless if suddenly the market said they're worthless. , and of course right now we have a different regulatory environment coming in place with crypto currency.
President Trump has said he's going to have a more lenient regulatory environment. And I'm I'm not so sure that's good or bad, I don't know, but that is a risk factor in the sense that much as we had the financial market meltdown in 2008 from mortgages and housing impact the market for stocks, a cryptocurrency meltdown could impact the stock market as well and have nothing to do with the fact that there are profitable AI companies out there.
So why am I speculating? And the reason is I'm speculating is because you need to be aware that anything can impact In fact, a market boom, anything can cause a, a down cycle and a correction. , even though I've given you all these great reasons why AI companies are making money, they're increasing productivity.
It sounds glorious. Doesn't it? It sounds like the next wave of our future as humans on this planet. And it could be, but at the same time, there could be a correction for something outside of AI's control and the technology companies control. Like a financial market meltdown, crypto meltdown, supply chain interruption.
So, what does that mean for you as an investor? Should you sit on the side and just investing money market funds or annuities and not take any risk? And because of all the possibilities of what could happen, the black swan events that we can't see that can come in and wipe out your portfolio in a minute.
And I'm going to answer that question with a story. And it's actually a movie. One of my favorite movies is Ronin. I don't know if you're familiar with that. It was a movie in the 90s, I think mid 90s. It starred Robert De Niro. And at the beginning of the movie, Robert De Niro is playing the part of an undercover CIA operative.
It's And he was, the opening of the movie, he was going in to meet a contact for an undercover operation. He'd never met that contact before. And he was going into kind of a questionable dive bar in a foreign country. But before he went into the front of the bar, he went around the back, and he made sure the door was unlocked, and he hid a gun in a
And then he went around to the front, went in and met his contact. Nothing happened, he didn't need a gun. But as he exited the bar, , he took his contact out through the back, so he could retrieve his gun. And a contact said, who was Gene, um, Russo, I believe. Contact said, why do you have a gun there? And De Niro said something that's always stuck with me, and I think every investor should remember this.
De Niro said, I never go into any place unless I know how I'm gonna get out. That's why he put the gun. He never goes into anything without an exit plan. And as an investor, you should do the same thing. It's not about speculation, whether we're in a boom or a bust, whether crypto or AI is a better investment.
Or whether tulip bulbs are a better investment. If you know how to manage risk, you can make money in any market. Because you know how to get out at the right time. You go in with an exit plan and going in with knowing how to do a risk management. And there are techniques that we teach at tax for millionaires and our courses.
Every course that we teach on how to invest in the stock market teaches you how to protect your investments, how to make sure you don't lose a lot of money. Maybe it's just a little bit, but you're going to make a lot more because you're never going to expose all your capital to a crash so you can sleep at night.
And by the way, if you are good at risk management, you can be a winner in any market, whether it's two bulbs, crypto or the AI market, whether one has intrinsic value or not, , you get in and make money and you protect your profits from being eaten up by a crash, it doesn't matter how you made that money.
All that matters is now you will have that money. You will protect it. And you can use it to reinvest. So protecting your capital is key. So even an investor in tulip bulbs can make and keep more than anyone. If they are better at managing risk. Again, that's why at every course tax free millionaires, we incorporate risk management techniques into every course.
I didn't mean to scare you with all the things that could cause the AI boom to crash. What I meant to do is, is enlighten you with the fact that you can sleep at night. You can make money. Because you can apply good risk management to your portfolio. Learn from history, but don't be paralyzed by it.
Technology changes the world, but smart investing is about understanding both the potential and the limitations. If you want to learn more and get on the list to get a free copy of my book, tax free millionaires, then be sure to join our Facebook group at facebook. com forward slash groups, forward slash tax free millionaires.
So remember, stay curious, stay informed, and most importantly, stay rational. Remember to invest smart and retire early. Thanks for listening, and I'll see you next week. Take care.
