\n
![](\"https:\/\/content.fortune.com\/wp-content\/uploads\/2024\/02\/GettyImages-1258278568_aa632c-e1709140033623.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
Every time investors have braced themselves for the AI bubble to burst in the last few months, a new eye-popping data point comes out to prove them wrong and send money flowing back into the stock market.<\/p>\n
The latest shock was Nvidia\u2019s latest quarterly earnings, which managed to surpass investors\u2019 already sky-high expectations and set records for valuation increases. Investors have since been falling over themselves to declare a golden era of AI application.<\/p>\n
And it\u2019s not just Nvidia. Companies across the supply chain, including established brands like ASML and exciting upstarts like Arm, have enjoyed booming valuations since investors caught wind of the excitement around AI.<\/p>\n
But there are dissenters within the ranks who are warning against a continued boom for AI and Nvidia\u2019s place at its peak.<\/p>\n
In each investor\u2019s scope is one standout point, you should be wary of the early success of the first-mover.\u00a0<\/p>\n
Fortune\u2019s <\/em>Shawn Tully spoke with two investors<\/a> who remain skeptical of Nvidia\u2019s boom and the wider AI rally in general.\u00a0<\/p>\n The first was Rob Arnott, the founder and chairman of Research Affiliates, which oversees investment strategies for $139 billion worth of mutual funds and ETFs.<\/p>\n \u201cIt was usually not true that first, the new technology brought on change nearly as rapid as the markets predicted,\u201d he told Fortune<\/em>. \u201cAnd second, it was often not true that these will be the dominant players 5 or 10 or even 20 years in the future.\u201d<\/p>\n In addition to skepticism about the long-term power of the first-mover, Arnott thinks Nvidia\u2019s current valuation is too high, leaving no room for negative shocks or disappointing results.<\/p>\n Terry Smith, the 70-year-old fund manager labeled \u201cBritain\u2019s Warren Buffett,\u201d knows a thing or two about bubbles from his decades at the helm of the U.K.\u2019s biggest retail investor-driven funds.<\/p>\n Smith\u2019s investment strategy is similar to Warren Buffett\u2019s, picking stocks based on their underlying value in search of long-term rewards, leading to his nickname. It appears to be why he\u2019s staying away from the current rally.<\/p>\n In his annual letter to shareholders<\/a> published in January, Smith said investors believe they have been able to pick the winners and losers of the AI rush.<\/p>\n \u201cIf it can do so at this stage it would seem to me to be a break with tradition,\u201d Smith said.<\/p>\n In a similar sentiment to Arnott, Smith pointed to the first movers in every major technological milestone, like Yahoo\u2019s early command over the search engine to Nokia\u2019s dominance of mobile phones and Myspace\u2019s initial popularity as a social media platform.<\/p>\n Smith said there may not be any winners from the AI boom at all. To hammer this point home, he used a \u201cfootball stadium\u201d (soccer) analogy.\u00a0<\/p>\n \u201cAs the game becomes exciting and the striker runs into the penalty area with the ball, the second row of spectators stands up to get a better view,\u201d Smith wrote.<\/p>\n \u201cThis blocks the view of those in the third row who follow suit. Pretty soon all the spectators are standing but no one has a better view than before, but they are all less comfortable.\u201d<\/p>\n Speaking on stockbroker AJ Bell\u2019s Money and Markets podcast<\/a> last week, Smith said he still didn\u2019t own any shares in Nvidia, or any of the other \u201cMagnificent Seven\u201d group of stocks for that matter.<\/p>\n Fortune\u2019s <\/em>Tully also spoke with accountant Jack Ciesielski, the former author of Analyst\u2019s Accounting Observer.\u00a0<\/p>\n Like Smith, Ciesielski was able to point to other early leaders in previous great leaps forward in previous technology booms, and they\u2019re tough for even nerds to remember.<\/p>\n \u201cRemember what happened in word processing and early PCs,\u201d he says. \u201cFirst, you had the likes of WordPerfect, Ami Pro and Lotus, along with Commodore, Radio Shack and Eagle. But they lost, and the prizes went to Apple and Microsoft.\u00a0<\/p>\n \u201cIt was the same in the early days of The Internet. The companies that laid the cable such as UUNET and Lucent got big valuations, and are no longer with us. But those that thrived turned out to be the Amazons, Googles and companies that used the pipes.\u201d<\/p>\n Ciesielski surmises: \u201cIt\u2019s not the first movers who usually win, it\u2019s the second movers.\u201d<\/p>\n Ciesielski is far from alone in pointing out that second movers usually take the spoils, and it\u2019s not just a phenomenon of the tech world. Indeed, it\u2019s something that stretches back centuries to the industrial revolution.<\/p>\n Speaking to Fortune\u2019s<\/em> Will Daniel, Goldman Sachs\u2019 chief global equity strategist and head of macro research in Europe, Peter Oppenheimer made a comparison with the London canal systems of the 18th century<\/a>.<\/p>\n At the time, there was a flurry of investment into canal operators at the forefront of vastly improved transport links that displaced the horse and carriage.<\/p>\n Instead, it was the companies utilizing the canals for their products that became long-term winners. The lesson for AI means the biggest winners of the tech boom could be people utilizing it to make new products and services.<\/p>\n \u201cThe biggest winners are the people that can use the technologies to develop new products and services.\u201d<\/p>\n The bulls of the AI world\u2014and its current kingmakers\u2014still hold the high ground. But wary investors will give them food for thought: is Nvidia the next Apple, or Radioshack?<\/p>\n<\/div>\nAI boom is like a soccer stadium<\/strong><\/h2>\n
\u2018It\u2019s not the first movers who usually win, it\u2019s the second movers\u2019<\/strong><\/h2>\n
Canal systems<\/strong><\/h2>\n
Subscribe to the new Fortune CEO Weekly Europe newsletter to get corner office insights on the biggest business stories in Europe. Sign up<\/a> for free.<\/div>\n