Is the AI Bubble About to Burst? Plus, Apple Bets on Doorbells
00:01is the AI bubble here.Molly Fool and Gems Investing starts now.Welcome to Molly Foolin' Jems Investing.I'm joined today by Lou Whiteman and John Quast.Guys, we try not to talk about the AI bubble all that much here,at least on the shows that I'm hosting,because I think it's one of those topics that you could talk about it absolutely every day.And one day you'll be right, but most days you're going to be wrong.
00:29But Ray Dalio had an interview that recently came outwhere he was talking about how this is going to burst,relatively soon.Higher interest rates are going to be one of the catalysts for that potential bursting of the bubble.And John, the thing that sticks out to me, as I've thought about this, I like to think aboutwhat are the sustainable business models that are coming out of the AI industry.It doesn't seem like there's a lot of them, despite the fact that we're spending severaltrillion dollars.
00:55But the thing that really sticks out is that we keep taking out more and more debt.And it's like every single company, even the hyperscalers are taking out more and moredebt. Eventually, that might be problematic, but would you think about what Dahlio had to say?Ah, yes, Ray Dahlio. Listen, he's an incredibly smart person, and I do like listening to him.At the same time, he was talking about bubbles before AI was even a thing. So he would be talkingabout a stock market bubble regardless of what was happening right now. In fact, he has been,so that's why I feel really good about saying that. And to put this into perspective,little bit. What did he say? He did not say we're at a place where this is getting close to a
01:38bubble bursting. He said, we're close to a point where an AI bubble could burst. We're at thestep before being close to a potential bursting. So I feel like he's really... We're at the pointbefore the point that matters. Exactly. So to quote Aragorn from Lord of the Rings, I mean,it may be coming one day, but it is not this day. Lou, does that resonate with you? I think this is oneone of those things where it seems like the risk factors are getting bigger and bigger.We just learned over the last 24 hours that SpaceX is looking for another $40 billion in debt.Everybody almost at this point is taking out debt to buy GPUs.Is that just okay until it's not okay?
02:18For the record, Bridgewater is long a lot of things.So I don't know if I, DeLio, I don't think he's a perma bear, but he does.Yeah, he's been saying this a while.here's the thing. And like John said, I don't disagree with anything Dahlio said. I think the scenario he lays out is likely to happen. The question is timing. Ray could have said this six months ago. He did. He could have said it a year ago. In fact, he did. He could be saying this six months from now. So as investors, I don't see this as signal, but I do think, like, look, we need to think of the world in terms of pendulums. This, like everything else, will not last forever. It doesn't mean avoid. It doesn't mean go short.but it means set positions accordingly.Look, we are closer now than we were to inevitably the music slowing or stopping.I don't really think debt is what gets us right now.I would push back, and I don't think Ray was really saying that, but I would push back
03:15if he says that now.I think debt is manageable until it isn't.And again, when does the isn't happen?Not yet.So, Lou, how are you positioning yourself?How do you think about what?positions am I going to avoid? Where am I going to look for opportunities? Because I think that'sultimately the question that we should always be asking right now is you're right. There's probably,
03:37I've heard a lot of really smart people say, of course, this is a bubble. And that doesn'tmean that it's not, you know, 1997 and we have another three years left of this. But what Ialways think about is, do you want to be running in front of the bubble? Do you want to be, you know,buying the most hype names in not know whether it's 1997 or early in two.where you're going to suddenly be sitting on a company that you thought was phenomenal.JDS Unifase was mine back in those days that ended up being a complete disaster.So how do you think about positioning yourself in a moment like this, both from a risk and anopportunity side?
04:14My core belief in investing is there's always value somewhere.And I am always trying to find that value.I don't find individual AI stocks by and large all that appealing right now.I think the run has happened.I don't want to be buying individual names right now,maybe with exceptions as things maybe get cheaper.But look, here's the great thing.There are so many great opportunities right now I see outside of AI for my individual
04:44money.I talked about banks, but banks are just ridiculously cheap.And you can also use that concentration in the S&P 500 to your advantage.I have a lot of index funds, a lot of those sorts of vehicles,to the extent that the AI trade keeps working, having all of that concentration in the S&P 500works to your advantage because you are getting oversized exposure to that.I'm sort of letting it ride, like let the market ride AI hire for me and look for individualopportunities outside of this where I can see, I think I see better pricing.
05:20Does that resonate with you, John?I want to go back to something that you were kind of alluding to there.when does a bubble pop?And to go back to Dahlio's framework,he really kind of cites three primary catalysts,and he says that you do need a catalyst.A bubble can inflate, inflate,but unless you have a catalyst for popping it,
05:40a pin, so to speak,then nothing really happens.And he cites three things.He cites rising interest ratesas a potential, like generally speaking,not necessarily right now,but generally speaking,rising interest rates,
05:53stock issuance,and a sudden need to convertwealth. So think of Elon Musk, for example, a trillionaire, but he doesn't have a trilliondollars, right? That's tied up wealth. If you needed to convert that wealth into cash by liquidatingsome assets, then that's another thing that can pop a bubble. So a lot of people retiring,that would be one of the things that potential happen to it. You are pulling money out of the marketbecause you're retiring. Exactly. That would be one definite way that it would trigger somethingconverting wealth into cash. I will say that that's not the one that Dahlio himself,
06:26in making his case, making his argument is the one he's highlighting. In fact, he's highlightinga potential wealth tax as one of the things that would trigger this. Now, just to be clear,this is him making his argument, making his case, and this is one of his main things that he'sbringing to the table. It's not happening until next election cycle at the earliest as far as I'mconcerned. So this is not something that is imminent. So I actually don't see anything toscary about this bubble right now if it is a bubble. I mean, you look at something likeMicron. Micron is now generating more operating profit than Apple. To me, that's very differentthan some of the dot-com names back at the peak of the previous bubble. Yeah, we'll see where
07:13this goes. We definitely want to keep this on people's radar because the risks are different thanthey were three years ago, five years ago. And so, you know, some sort of correction may makesense at some point in the future. When we come back, we're going to talk about Google's newnuclear deal. We'll do that in the moment. Welcome back to the show. Google made another bigannouncement over the past day or so that they're buying more nuclear power this time fromConstellation Energy. John, the details are getting pretty wild, just the commitment thesecompanies are making to this AI buildup and the energy behind it. And that's where we kind of arein this bottleneck conversation is where in the world is all this energy going to come from.
07:5520-year power purchase agreement with Constellation Energy is going to add an incremental 890million, or sorry, 890 megawatts of new nuclear reactor capacity, $4.3 billion worth of investment.Nuclear seems like it's hot again for investors.Yeah, and this is absolutely the way to go if you are Google or if really anyone,you're right, we do need a lot more power.Maybe I'm biased.I do have nuclear people in the family.but to me, this is the way to go.
08:27You have an existing infrastructure,and you can generate more power from that infrastructure.Uprating a nuclear plant, to me, makes a ton of sense,especially if you're looking to get it deployed quickly.Now, I will say that this is a huge move,and yet, in the grand scheme of what we're talking aboutand what we're projecting,maybe not as big as we need it to be.
08:53So according to Bloomberg,N-E-F, we may need something on the magnitude of 100 gigawatts of power for new data centersbetween now and 2035.So if we supplied a record amount of, or hooked up a record amount of new data centers overthe next, you know, 10 years, even at a record pace, we would still fall short.So the 100, let's say that 100 gigawatts is about right.I have no idea if it's right or not, but Bloomberg Nef says maybe it is.the Google deal is for less than 1% of that.
09:27And you might say, well, John, that's only right now.But it's not because signing the deal now, maybe that gets uprated and into generating that power that they've contracted by the end of 2032.So this is really more of a decade news item than a right now news item.And it's still not enough.Yeah, Lou, the big thing here seems like there's this retrofitting piece.So there's these nuclear plants like three mile island from a,how to deal with Microsoft a few years ago.That was one of the first big ones.
09:59Building new power plants is a whole other thing.But John's right.The demand when you start to look out three, four, five years is absolutely crazy.So it wouldn't be shocking to see more of these deals happen.I guess it wouldn't be.Well, it would be shocking because we're running out of capacity for retrofitting.That's the thing.It's like most of these times have been done.
10:17Right.It's funny because this is both the bull case and the bear case for nuclear.I think all in one thing.It makes all the sense in the world to take the existing infrastructure and keep it going or to build it up where we can.I have nothing else. People who think about this, but just the infrastructure, the power lines, the grid going into these things are already established.Even that takes time on new construction. So yes, this should and will continue until we are maxed down on capacity.But I think we're also seeing just how insanely complicated it is to, I mean, it's going to take years to do.do this. So don't talk to me about Greenfield anytime soon. There's a long way towards
10:59nukes actually like new construction and actually getting going. You know, that it's interestingbecause yeah, do all these deals, make it happen, but also realize that I still am not convincedthat given the complexities of just kind of keeping existing things going or building them up,how again are we going to get a new maybe trillion dollar plant?Yeah, and Lou, I know down in your neck of the woods, you may actually be paying for the Vogel expansion.That took 15 years to develop.I remember writing about that back in the mid-2010s.You know, Obama was still president at this point when a lot of that was financed.
11:41It didn't open, or at least part of it didn't open until 2024.So the timelines on some of these nuclear deals in particular can span decades.That does seem like a real challenge.Here's the other little subtle thing, I think, as investors we should realize here, and I think we knew this already.Forget this brief period where these data centers are being subsidized, where there were communities and everybody was, you know, competing.Google's paying its own way here.The Google is making this work.That's the way it should be, and that's the way it is from here.
12:15Back to our earlier conversation about all the expenses, there was a belief briefly that maybe communities,would cover some of this and taxesand there'd be ways to get this back.That train is left the station.Yeah, probably for the best,for the political, potential political backlashto some of these AI data centers and stuff like that.If it's not a added cost,
12:37maybe even a little bit of benefit to people,that should be a good thing.When we come back,we're going to talk about Apple making doorbells.We're on that in a moment.Reaching your audience on Spotify with display ads is easy.Use your existing creativeand launch your first campaign in minutes with Spotify Ads Manager.
12:59We're getting towards the end of the year,but it sounds like Apple has one more big announcement to make.Bloomberg's Mark German is reporting the companyis going to be introducing some sort of home hub.But now what came out recently,Lou, was doorbells, indoor and outdoor cameras,all kinds of other devices that are going to connect into this smart home device.What's interesting is we've been here before.
13:21Apple introduced the home app,which I still have.have on my phone, I still don't know exactly what I'm supposed to do with it. That was almostexactly a decade ago from today. Can they actually do this? Can they actually get into thesmart home with the help of other companies manufacturing the products? Because the big thingis that LG is going to make some of this stuff. Now you've suddenly going from being completelyvertically integrated in phones to, hey, we need a bunch of partners here in the smart home. Canthey do it? We were promised cars and TVs and all sorts of things and we're getting doorbells. So how
13:53about that, right? Welcome, and I mean, we've discussed this before, welcome to the age of incrementalism, all right? No, these are not the next big thing. Steve Jobs would not be going on stage and like a doorbell, especially since everyone else has had this for a decade. But I think it makes sense for both sides because it is just kind of building out product lists and ecosystems without too much risk and without too much CAPEX. I don't think Apple or Lsees this as a huge hit or a iPhone-like device.But I do think increasingly, you know, kind of controlling or kind of the walled garden of theconsumer relationship, if Apple can expand that or try again, as you say, to expand that tokind of home automation, things like that, it makes sense for them to be there.And I think it makes sense for LG to kind of nibble out beyond home appliances andtrying with a good partner and a good brand, LG on its own is not going to sell a lot ofdoorbells versus Amazon or Google with Apple. I think they will sell a lot. So I think it's kind of
15:06a nothing for investors for both companies, but I think it makes sense for both of them.What do you think, John? Yeah, I think that if you're thinking of this as a big move and a bigannouncement, then it doesn't make sense for either side, quite honestly. I mean, you look at Apple,so it's going to move towards a new and improved AI smart home,but what does Apple actually bring to the table?If LG is keeping the branding on the devices themselves,the AI models, Apple is partnered with Google's Gemini.So there's a hub device maybe,
15:40but it's going to be a higher price point, I'm sure,than either Amazon or Google.So that's going to be a hard sell,especially if you already have that deployed in your home.And then you can maybe sell some,subscriptions if you're Apple, which that's good, but do you actually open yourself up to a brandnew consumer base to sell those subscriptions? I don't really know if you do. Yeah, you're going to runsecurity systems, yeah. But then you go back to LG. I mean, if you think that this is the next big thing,
16:07okay, so you're keeping the low margin hardware and seeding more of the high margin subscription to Apple,but you already have your own service that you could sell. So yeah, if it's a big thing,it makes sense for neither company.If it's a small thing, it makes sense for both.Yeah, this one's going to be really interestingbecause they've been talking about the Home Hubfor a very long time.This almost seems like I'll ask gasp effort.
16:30If they can't make something that's going to make,be compelling to me, to be honest,we have a ton of Apple devices in the house,but we're using SimplySafe.You could use ADT.There's a bunch of different suppliers out there.And those devices are pretty cheap.That's where it's sort of a head scratcher to me is,
16:47I think Simplysay,for right now has a 65% off deal. You can get cameras for, you know, $50, $75. That just doesn't seemlike a price point that is very Apple-like. So I don't even know if this ends up in their stores.But we'll learn more next week. So I'm sure we'll be back to talk about that. As always,people on the program may have interest in the stocks they talk about and the Monty Fool may haveformal recommendations for or against. So don't buy our sell stocks based solely on what you hear.All personal finance content follows the Monly Fool's editorial standards and is not approved byadvertisers. Advertisements are sponsored content and provided for informational purposes only.
17:20To see our full advertising disclosure, please check out our show notes.For Lou Whiteman, John Kost and Dan Boyd behind the glass, I'm Travis Hoyam. Thanks for listening.We'll see you here tomorrow.
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