AI Stocks Can't Lead the Market Much Longer. Invest Internationally Instead: Dan Rasmussen, Verdad Capital
Feb 21, 2025
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Dan Rasmussen, founder of Verdad Capital and author of 'The Humble Investor', dives into the shifting landscape of AI stocks and the need for global diversification. He argues that the high-flying AI stocks are peaking due to rising capital demands, making sustained growth questionable. Instead of solely investing domestically, he highlights the benefits of looking internationally, where valuations are more attractive. Rasmussen also draws intriguing parallels between today's market and historical bubbles, urging humility in investment strategies.
AI stocks are transitioning to capital-intensive operations, threatening their previous high-growth status amid rising operational costs.
Investors should consider international diversification, as many global stocks offer better value compared to overpriced U.S. tech companies.
Deep dives
Concerns About AI Stock Valuations
AI stocks have been dominant in the financial markets, but concerns arise regarding their future valuations. The increase in capital expenditures for these tech companies signifies a shift from their previously capital-light model to a more intensive and costly investment strategy. This transition could undermine their classification as high-growth stocks, especially as these companies may become even more resource-intensive. Investors need to reassess the sustainability of this growth model and consider whether current valuations accurately reflect the rising operational costs.
The Impact of Capital Expenditures
The rise in capital spending among major tech firms reflects a collective bet on the future of AI and scalability, which necessitates significantly more investment. These companies, traditionally known for their quick growth with minimal capital, now face a reality where they must spend heavily to maintain profitability. This shift risks diminishing their overall business quality, moving from software-based models to more capital-intensive operations that echo industrial sectors. As firms invest heavily in AI, the potential for poor returns looms, raising questions about whether all players in this space can thrive amid fierce competition.
Competition and Profitability in the AI Sector
The push for AI investment has led to widespread competition in developing similar technologies, with multiple companies vying for market share. This environment may lead to what is termed 'competition neglect,' where firms underestimate the fierce competition they face in terms of costs and pricing strategies. The analogy to commoditized industries underlines the risk that profits will be driven down as more companies aggressively spend to establish their presence in the market. The reality is that the AI space may not support all players, and the race to capture revenue could result in lower margins across the board.
Global Diversification as a Strategy
With the U.S. technology sector heavily reliant on a small number of companies, there is a strong case for investors to diversify internationally. Many global stocks are undervalued compared to their U.S. counterparts, presenting an opportunity to achieve better risk-adjusted returns. Adopting a market-cap-weighted or earnings-weighted international strategy might counterbalance the risks presented by concentrated bets on U.S. tech companies. Such a strategic shift could lead to more stable long-term growth, particularly if the dominant U.S. firms falter in the face of changing market dynamics.
Dan Rasmussen of Verdad Capital joins the podcast to discuss the dwindling prospects for AI stocks and why investors might want to look outside the US for better returns. This podcast episode was released to premium subscribers on Monday, Feb. 17, 2025 without ads or announcements. For more information about premium membership options, visit our Substack. Content Highlights
AI stocks have been on an incredible run, massively growing profits without much capital spending. That equation has changed... (1:51);
Tech companies are going from software businesses to manufacturing concerns -- capital- and energy-intensive businesses that simply can't produce the same growth as previous (6:03);
DeepSeek claims to be able to reduce the cost of AI applications. How does that factor in to the equation? (9:09);
So if the 'Mag 7' and AI stocks won't drive the market higher, then what will? Where will growth come from? (12:16);
One place to start is to look for global diversification. Outside the US, stocks are meaningful cheaper... (15:24);
The guest's book 'The Humble Investor' (21:37);
What can supply 'edge' in investing? There are some things. Legal ones... (27:10);
Background on the guest (33:02);
The guest is a historian by trade. What historical period is perhaps most comparable to the present day? Unfortunately, it looks an awful lot like 'peak bubble'... (36:08);