Hey everyone, welcome back to the show. Today, we’re diving into a topic that’s on everyone’s mind: the AI boom. Is it a bubble waiting to burst, or are we still in the early innings of something truly transformative? More importantly, how do we invest smartly in this space regardless of the answer? Let’s unpack this with some fascinating insights and specific stock picks that could help you navigate these choppy waters.
First off, let’s address the big question: are we in an AI bubble? The consensus right now is, probably not yet. A good rule of thumb in markets is that when everyone is asking if it’s a bubble, it often means we’re not quite there. If we look at the data—investment cycles, credit cycles, and market fundamentals—it suggests we’re still in a healthy environment with room to grow. Valuations for major players like Alphabet, Microsoft, Meta, and Amazon aren’t at crazy levels, especially given their earnings growth. Plus, unlike the dot-com bust, these companies are flush with cash, generating hundreds of billions in operating earnings to fund their growth without piling on debt. So, for now, let’s call it a boom, not a bubble—but that doesn’t mean we should throw caution to the wind.
What’s really interesting, though, is that whether we’re in a bubble or not might be beside the point when building a portfolio. The key is focusing on companies with strong economic moats—those competitive advantages that protect their market position and profitability over time. Think of moats as a castle’s defense system; they can be anything from network effects, like Visa’s multi-sided platform, to switching costs, like Microsoft’s sticky ecosystem where moving away feels like professional anarchy. By zeroing in on moats, you can find businesses that thrive through booms and busts, AI or otherwise.
Let’s talk about two companies with rock-solid moats that could be great additions to your portfolio. First up is United Rentals, a seemingly boring equipment rental business. But here’s the magic: it’s a scale distributor. As it grows, opening new locations with broad supplier and customer relationships, its return on assets keeps climbing. Over the past decade, its market share has gone from 10% to 15%, and its returns have compounded massively—up 5,000% over 20 years. The market isn’t pricing in this continued growth, and whether AI drives more manufacturing or not, this company’s fundamentals suggest it has a lot more room to run. Then there’s Baker Hughes, an oil and gas equipment services firm with a moat built on process know-how. They’ve honed a niche competency in helping drillers optimize reserves—a skill that takes decades to replicate. Even if energy prices wobble short-term, over a 10- to 15-year horizon, their competitive edge should compound returns nicely.
On the flip side, not every company is a safe bet. Take Oracle, for instance. Once a powerhouse with a fantastic moat in enterprise software—where switching systems is a CEO’s nightmare—they’ve pivoted to building data centers for AI players like OpenAI. Problem is, data centers are a lower-return, less durable business model. Their return on assets has been fading, and while the stock has surged on AI hype, the structural shift to a weaker moat makes it a risky long-term hold. It’s a classic case of a company abandoning a strong competitive advantage for a shinier, but shakier, opportunity.
So why does all this matter to you? In a market obsessed with AI’s next big thing, focusing on moats over hype is your secret weapon. It’s not about predicting the bubble’s burst; it’s about owning businesses that endure. Whether it’s a United Rentals quietly compounding or avoiding an Oracle chasing trends, moats give you clarity amidst the noise. Stick with me as we keep exploring how to invest smarter in this wild tech landscape. Until next time, happy investing!