Price Check on Terminal Value
Will anything stop this AI train?
high growth companies at a discount
a great wall of profits
AI keeps cooking, and the hyperscalers know
the train is hurtling forward as quickly as prices say it is . . . so can anything stop this train?
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Last week, Random Walk mused about the weirdness in public equity valuations.
Yes, the stock market is clipping all-time-highs, and yet, you could argue that it’s not high enough . . . profits are accelerating, while the price of those profits compress. It just doesn’t happen very often (and nor would one expect it to).
High-growth companies are still not being rewarded commensurate with their growth:
Price performance for even high-growth companies has substantially lagged forecast profit-growth since late last year.
A great wall of profits
But, it’s not just high-growth companies putting on a show.
I mean, there’s a great wall of profits, and it keeps on climbing:
Every single sector in the S&P is appears to be prepping for a Walter Payton summer training program.
Since then, the market melt-up has mostly continued, and even then, it’s still weird . . . because on the other hand, whatever you think of profit-growth, isn’t there some kind of massive oil shortage that’s going to crush demand and supply chains the world over?
There’s some evidence that demand-destruction has already started:
Air-Freight prices go up, Air-Freight volumes go down.
That, of course, could be the discount weighing on those impressive earnings—the bullishness of the AI trade has mostly outweighed the bearishness of Hormuz, but “mostly” is not the same as “entirely.”
Fair enough.
ICYMI
AI Keeps Cooking
What we do know, however, is that the AI trade is showing no signs of slowing down. Whatever oil, fertilizer, resin, helium, etc. shortage we’ve got coming, it’s got nothing on the apparent shortage of available compute.
Why do the hyperscalers keep pouring historic amounts of money into data centers and chips? Well, earlier this week, they gave us a clue:
