AI's Value Accrual: Consumer Gain or Creator's Loss?

Summary

The current market, despite showing extreme overvaluation by metrics like the Schiller PE, presents opportunities in small and micro-cap value stocks, which have historically outperformed during similar periods. This trend is potentially reversing the decade-long dominance of large-cap growth. AI's transformative potential is undeniable, with significant capital expenditure, but its ultimate value accrual remains uncertain. It's possible the immense value generated by AI will primarily benefit consumers, not the creators of these advanced models. This is because AI models might commoditize, with consumers opting for less expensive, slightly older versions, much like how internet services became accessible and affordable. Historically, technological booms, like the dot-com era, saw initial hype followed by a crash, but eventually, the technology delivered on its transformative promise. While AI's capabilities are impressive, the rapid depreciation of hardware and the potential for multiple AI providers to emerge suggest that supernormal returns for AI creators might not be sustainable in the long run. Instead, investors betting on mean reversion in market multiples and growth rates should consider small and micro-cap value as a smart bet.