Pop goes another bubble

55 years ago in 1969 the US government developed a computer network called ARPANET which stood for Advanced Research Projects Agency Network, it was the first of its kind, although computer networks which allow computers to communicate with each other had been around for almost two decades by that point, ARPANET was the first to span a wide geographic area. ARPANET evolved over many decades, today we know it simply as the Internet. This is the story of the hardware that underpins everything we do online, including the fact that you're reading this post right now.

The software on the other hand took a while longer to evolve. Various applications designed to use the internet came and went. Attempts to utilise the Internet to connect consumers came to market, had limited success, and failed. From the ability to order food through the Internet which had limited success in the 1970s and 1980s it wasn't until 1989 when a researcher named Tim Berners-Lee whilst working at CERN developed the World Wide Web, a client-server system that allowed a server to host a document and clients to connect and retrieve it.

Although today CERN is perhaps best known for the Large Hadron Collider, a particle accelerator beneath Switzerland that conducts research into sub-atomic particles and black hole formation amongst other things, it was the work of Tim Berners-Lee that made it possible for us to use the Internet as we do today, so much so that the Web and the Internet are now synonymous with most people unable to explain the difference.

In the almost 40 years that have passed since the invention of the World Wide Web, the history of the internet has not been without controversy for many different sociological, political, and economic reasons, most of which you could spend a lifetime studying, researching, and attempting to understand and you would barely scratch the surface.

I think the most relevant part of the history of the internet today however is something that was known in the early 2000s as the DotCom Bubble or more aptly, the DotCom Crash. You see throughout the 90s as the use of the internet spread, so too did the affordability and accessibility of the computer itself. It was during the 90s that PCs went from being the price of a house to being yet another electronic that you could buy to put in one - albeit they were still relatively expensive, the point was the average consumer could conceivably buy one, and the popularity of the internet was a driving factor in computer sales, it just wasn't the main reason people bought one - yet.

With any upward trend such as this, capitalism takes an interest, and nearing the end of the 90s there was a moment of fever-pitch when companies wanted to ride the wave, or perhaps more apropos, they wanted to surf. Anyone and everyone wanted to have a web presence, and so there was an explosion in growth. Many companies that realistically had no viable reason to need a website still got in on the act. The perceived value of the internet went through the roof and investors made a fortune, but the market is not without karma, you can only stretch valuations beyond their reality so far. In terms of stock, this is known as P/E or Price to Earnings, a ratio that pits the price of the stock as the perceived value of a company against the actual earnings of that company, in other words how much it is actually making.

Historically, and to this day for that matter, a high value company that consistently brings in earnings at or above target can command a P/E of 15 to 20 times their earnings, a company like Amazon today has a P/E of around 35 to 40, despite being high above the average, it's a pretty safe stock to buy and hold because whatever the sentiment people hold with regards to Amazon as a company, it still makes significant profits and can justify the price. During the DotCom bubble however, many companies saw their stocks rise and their prices eventually reached that same value at around 40 times their earnings - when the growth didn't follow through and the reality that these companies weren't going to pull billions of dollars out of thin air, investors fled and the market crashed, some $5 trillion of value was wiped out.

Despite the fact that this was ostensibly a very bad thing at the time, it wasn't without a silver lining. It was primarily thanks to the DotCom Crash that Capitalism lost interest in the internet, and shifted their focus elsewhere - energy became the next major focus and the geopolitical risks and events that followed provided the volatility the market needed to regain its losses, this would be followed by investment banking, and eventually lead to mortgage securities and the inevitable collapse in the sub-prime mortgage market that caused the 2008 financial crisis.

The fact that Capitalism moved on from the internet and largely abandoned it was ultimately good because in the years that followed in absence of corporate ethos, it was the individual that drove the growth in use of the internet. Community driven sites like NewGrounds and EbaumsWorld used Shockwave Flash to deliver animations and games to users. A bacchanalia of content was produced, forums, chat rooms, newsgroups, usenet, email, and instant messengers all flooded the internet, used primarily by younger users who wanted to connect with one another, then along came a little site called YouTube, which I have written about before and the democratisation of video publishing that it enabled. That sense of democratisation was mirrored across industries, the individual was given the ability to amplify their creativity with a moderate amount of effort.

This growth did not go unnoticed by corporations but burned by the DotCom crash they were still hesitant to re-enter the market. That's where start-ups move in, craving out niches they capitalised on their growth and large corporations started buying them. Google Inc went from a small company with a few employees to a multi billion dollar conglomerate that acquired companies left right and centre, including YouTube which it acquired for $1.65 billion after its own offering Google Video failed to gain traction. This wasn't the first company Google had bought and it wasn't the last, but the price target raised eyebrows, Capitalism went from sniffing the spoon the internet was holding out for it and dipped its tongue in for a taste, before plunging into the plate face first and gorging itself once more.

For good or for bad, the Internet today has an established ecosystem, one that spans industries, and crucially, one that is no longer dependent on the profitability of companies to survive. Even if a behemoth such as Amazon or Google were to collapse today, the Internet would survive, arguably this is because of that brief period in time when it was abandoned by capitalism and allowed to "find itself" or to be more precise, people were allowed to figure out for themselves just how exactly they wanted to use the internet.

Today, the multinational corporation Nvidia has a P/E ratio of 62 times its earnings, which stretches its perceived value far beyond reality. The company cannot realistically deliver the revenue expected by shareholders, the reason its price is so high however is because of the perception that Nvidia is at the forefront of Artificial Intelligence, not because of Nvidia's own AI enhanced products but because Nvidia makes Graphics Cards which without getting bogged down in the technical reasons, are simply extremely valuable to those developing AI applications. Artificial Intelligence systems require a lot of processing power and a lot of cooling, a graphics card offers both of these things but crucially they can carry out both discretely, that is to say, a Graphics Card can be given a specific task and then instructed to devote all of its effort to that task, without having to maintain the system it is installed in - that falls on the CPU and the Operating System of the host to manage.

The reason this is all relevant is because there is a perception that AI has become a bubble and in recent days Nvidia has seen its stock dive after guidance was released regarding their revenue expectations, as expected they won't meet the projections that many investors had hoped, this is partly due to investor delusions but also the fault of Nvidia who did nothing to bring people back to reality. With a P/E above 60 the fall is steep, if you have $6,000 invested in Nvidia right now and it were to fall to a P/E of 1.0 where price is at parity with its earnings, your $6,000 investment would fall to just $100, if you had $100 invested right now, that would fall to just $1.67 that would mean around 98% of the company's value was wiped out, for context this generally only happens when a company goes bust or is expected to.

I have said before in previous posts that I think AI has a lot of potential for good, but that the main problem right now is not what it is capable of, that will grow in time, the problem is most people are intrigued by it but don't actually know what to do with it. I actually hope Nvidia is going to collapse, I hope the AI bubble is about to pop because if humanity is to find a use for AI, it has to do so in the absence of profit as a motivating factor. A pop in the AI bubble causing the market to collapse would remove Capitalist interests in AI and allow the technology to be used on a small scale by those with a genuine interest in it, and a genuine understanding of it, to try and find the useful applications for it, in the same way the Internet came into its own during the years when it too was abandoned by Capitalism.

Nvidia's share price at the time of writing sits at $99.40 per share, down from its all time high two months ago of $135.58, despite this fall meaning the company lost 27% of its value it is still a valued as a trillion dollar company despite revenue of just $61 billion. Again you might see that figure and think that it isn't impossible to reach that value in revenue but this exposes the everyday consumer's lack of comprehension of the scale of these numbers, the jump from one thousand to one million is not on the same magnitude as the jump from one million to one billion, and is nowhere near the magnitude of one billion to one trillion.

To make one thousand dollars at $10 an hour you must work for one hundred hours, or just over 4 days straight without a break.

To make one million dollars at $10 an hour you must work for one hundred thousand hours, or just under 11 and a half years without a break.

To make one billion dollars at $10 an hour you must work for one hundred million hours, or eleven thousand, four hundred and seven years without a break.

To make one trillion dollars at $10 an hour you must work for one hundred billion hours, or 11.4 million years without a break.

For Nvidia to actually reach revenue anywhere near its valuation you have to do more than add a zero, with a global population of 8 billion people you would have to sell a product at $150 to every single person in the entire world, and that's just to meet the revenue target, to make $1 trillion in profit assuming a margin of around 10% you would need to sell every single person in the world a product at $150,000.

I want the AI bubble to pop, for humanity to gain anything of value from AI it has to be developed in the absence of capitalist interest, profit can't be the motivating factor, and as for those who will claim we have the internet today because of Capitalism, we do not, we have the internet today because of the application Tim Berners-Lee developed and made freely available to the world, because the DotCom bubble popped and trillions were lost and Capitalism explicitly abandoned the internet.

The argument may be moot, last week $2.9 trillion was wiped out as tech stocks are selling off, Nvidia amongst those losing most value, that's almost two thirds of the value lost to the DotCom crash and there are no signs of it slowing. Japan's Nikkei 225 index saw a drop of almost 13% the biggest fall in its history, and the contagion has spread, The FTSE 250 here in the UK is down 20% - the bubble may have already popped.

Update: As of August 6th the sell-off has deepened to $6.4 trillion, which surpasses the DotCom bubble