Let's catch up on the latest regarding some topics I've been writing about recently...
1) I've been pounding the table for quite some time that value stocks will start to outperform growth stocks. And so far this year, that seems to be the case.
The iShares Russell 1000 Value Fund (IWD) is up single digits year to date, while the iShares Russell 1000 Growth Fund (IWF) is in negative territory.
You can see their performance as of March 2 in Charlie Bilello's latest Week in Charts:
I've been predicting that international stocks will outperform U.S. stocks, which has been happening as well...
As you can see in this chart, international stocks have outperformed by 27% over the past 14 months – the biggest spread since the early '90s:
While the U.S. market has done well since the beginning of last year, it has actually trailed nearly all other international markets, as this chart shows:
This is a good lesson in the perils of chasing performance. Reversion to the mean, as these two examples show, is a powerful phenomenon in investing.
2) I continue to be bullish on Alphabet (GOOGL) for many reasons... one of which being the explosive growth of its driverless-car subsidiary, Waymo.
As Bilello's chart shows below, Waymo is now doing more than 1.2 million rides per month in California – an increase of 22 times over the past two years:
To underscore Waymo's importance, Alphabet's board has given CEO Sundar Pichai "bet performance units" tied to Waymo. These could be worth up to $260 million over the next three years, as this article from Sherwood News notes.
3) Another reason I'm bullish on Alphabet is that I think it's going to be a winner in AI – mainly at the expense of OpenAI.
I've written quite a bit about why I think OpenAI is going to implode (archive here), but I'm now even more convinced than ever. Its ChatGPT service is rapidly losing business market share to Anthropic's Claude...
As the chart below from Ramp Economics Lab shows, ChatGPT had around 90% market share last February – just one year later, Anthropic has around 70%:
This is consistent with my personal experience: I just canceled my ChatGPT subscription and signed up for Claude because studies I've read rate it higher.
Someone posting under the handle "jd5318" just pitched OpenAI's preferred securities on ValueInvestorsClub (requires a subscription):
OpenAI is on a path to building one of the deepest and most durable competitive moats in modern business. The "memory" feature the company introduced roughly six months ago, [which] may look like a simple product add-on, effectively stores a user's prior conversations so they can be retrieved at inference time. I view this as the early scaffolding for something far more powerful: true personalization of the model. Over time, I expect each user's data will be used not just for retrieval, but to shape a personalized instance of the assistant, moving the relationship from today's largely transactional interactions toward something increasingly persistent, contextual, and companionship-like.
This person thinks OpenAI's valuation could go up 2 times to 3 times:
My base-case returns framework is straightforward. If OpenAI continues executing up the adoption S-curve, expands from roughly 900 [million] weekly active users today to ~3 [billion] users over the next 3-4 years (i.e., Meta Platforms/Google-scale reach), and retains them as personalization deepens, then even relatively conservative monetization assumptions can support very large economics. For example: if ~5% of users ultimately pay ~$40/month, that implies on the order of ~$75 [billion] of consumer revenue. Layer in a comparable ~$75 [billion] enterprise business and you get ~$150 [billion] of revenue within a few years. On reasonable growth-asset multiples, that points to ~$1.5-$2.5 [trillion] of enterprise value, roughly a 2-3x outcome from here on a post-dilution, post-revenue-share basis.
I completely disagree – and the other ValueInvestorsClub members share my sentiment, giving this idea an average rating of 1.6 stars out of 10.
Here's one user's reply on the message board:
Google is best at multimodal. Anthropic is best at coding and now most business processes. And OpenAI is good at... signing deals with the Pentagon?
I was just hanging out with AI engineers all week. We discussed long Anthropic at a $380 billion valuation and short OpenAI at $730 billion. Pretty much every engineer would make that pairs trade today.
Another user made the case for Google and low-cost Chinese models over OpenAI:
OpenAI is in a lot of trouble in my opinion, and it's becoming more and more clear that they are the likely loser. In order to win as [a large language model] or provider of a model, you have to be able to either provide a "good" model at the cheap/cheapest price or the "best" model to potential customers.
If you're going the route of being a lower priced ("cheapest") provider, you need to be able to build/source infrastructure at the lowest cost. The Chinese models are winning in this space by leaps and bounds. In order to have the best model you need to have access to the best sources of data in real time. Google is crushing the competition in this regard as they have all the best data in the world (maps, search, satellite, Waymo, etc.). They also are building a durable cost advantage via building/insourcing their own [tensor processing units] at low cost.
OpenAI so far has been able to make up for their lack of data/cost advantage with great products and being a first mover in a lot of areas. But the reality is that over time better and/or cheaper players will win and compete away the first mover advantage that OpenAI has built. [OpenAI CEO] Sam Altman is a master salesman, but in the end, great product and low cost win. He also is getting increasingly frantic (see his interview with Brad Gerstner who is a shareholder and how defensive he got when asked a simple question).
My view is that OpenAI is the inevitable loser.
Finally, a third user chimed in with a list of factors:
1) Competitive moat: non-existent. Foundation models constantly one-up each other and have zero structural lock-in. Our own internal systems allow me to toggle between four easily, and I'm sure there will be more. Maybe there's some "brand value" but things seem to be moving way too fast, OpenAI has gone from best brand in the space to number 3 in like a month.
2) Capital intensity: This is only the... most capital intensive business of all time? Isn't that extremely awful?
3) [Intellectual property] protection: non-existent. The Chinese can prompt hack any innovation and reverse-engineer it in a week, which means every dollar spent training is basically being thrown down the drain?
4) Competitive dynamics: Awful. You have the most deep pocketed businesses on earth trying to throw money at beating you. One of them almost with religious conviction ([Meta CEO Mark] Zuckerberg). The "let's chase [adjusted gross income]" prisoners dilemma seems like it will destroy this business almost guaranteed?
5) Employees: Get poached with $100 million packages constantly. How do you stay on top? How do you keep talent?
This user concludes:
High innovation industries generally spawn a lot of bad businesses – just too expensive to keep up the innovation treadmill. Seems the case here.
I think this is just a situation where manic, insane growth and huge consumer surplus ("it's a great product") is masking what are terrible business fundamentals. I do not see a way out for them. This preferred security seems like an awful way to be involved as this has crazy risk – could easily just go the way of the fiber builders late 1990s. Way too many commitments and not enough funding.
The best result of this investment is just greater fool selling this to retail while it's still hot. Probably works, but you cannot be left holding the bag if funding ever runs out. The fact that they missed their target valuation here with this round for the first time does not seem like a great sign.
I think the three bearish comments are far more compelling than the bullish pitch.
I'm quite certain that OpenAI is toast. What's less certain is what impact its downfall will have on other companies, stocks, the overall market, and the economy. I'll be following this topic closely, so stay tuned.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.