[Fade_Dance]

It is addiction media, or dopamine hacking media.

Meta's recent earnings report was great partially because AI was used to boost engagement on ads by 5% to 10%, which was enough to get investors on board for the massive capex. ("Datacenters the size of Manhattan" as per Zuckerberg).

Datacenters the size of Manhattan and dedicated nuclear power plants, for an 8.5% boost in advertising engagement. The world is in a very sad state in some respects. The ideal end state of this optimization process is quite literally zombie consumers. I would think that heading off outcomes like this is partly why we create rules and guardrails as a society, but despite the occasional pushback, I do think that for now we are generally embracing this dystopia. I'm a positive person and think AI is incredible and will do many great things, but Meta's earnings report got to me.

[matthewdgreen]

I realize this is a dumb question, but: all of these advertising supported business must be downstream of the “real economy” (of products and goods) in some way. After all, for ad revenue to rise continuously it must be the case that product and service companies are continuously spending more on advertising. And yet in the stock market, nearly all growth comes from these ad-supported companies and earnings elsewhere don’t increase by as much. How sustainable is this?

[Fade_Dance]

Ad spending is definitely cyclical, and it's arguable there is complacency on that front.

That said, it wasn't that long ago where the space had a total washout (2022), and despite markets being relatively richly valued, the mega-cap ad companies have only gotten a strong bid more recently (institutional money has actually been under-exposed to the large tech names ex-NVIDIA based on historical look back). Google was actually near value territory until recently.

It's hard to predict how sustainable at all is though. One of the big factors is that these companies had a lot of intangible value that they could pull from. Ex: Meta could monetize Whatsapp, Google could actually ban YouTube ad-blockers (hey, they finally forced me to subscribe), and these companies also have some pricing power to harvest if needed. Then there is a layoff angle, which may not be great for their long-term success, but they have the power to lighten up and route massive buybacks if they ever want to focus on stock price (see META post 2022).

The other poster commenting about the sheer size of these companies is right too. The passive investing complex drives ever more money into ever bigger companies. Then you have trend following money (and most investors are trend following to some degree) reinforce those flows, and it creates a virtuous cycle ever upwards. On the sustainability question, it does look like quite a self perpetuating cycle but there's the caveat that these flows can reverse. If money were to flow out of US markets on net, such as the mega sell off earlier this year with 7% down days, then the piper is paid.

So to break it down, it's sustainable as long as American financial exceptionalism remains strong, and as long as these companies don't exhaust the levers that they can pull. Nonetheless, advertising is cyclical, and sometime in the future, you can guarantee that there will be another cycle of pessimism combined with weaker earnings (both of which combined to cause a major earnings contraction in a sector). When that happens, well that's not so easy to predict. In the meantime, these companies have pretty huge cash flows.

[kjkjadksj]

A lot of growth comes from automatic contributions to 401k and other such structures. So if people are buying the index, reasonable, but nvda alone makes up 5% the index by weight these days, guess what stock gets an outsized amount of buying irrespective of actual performance.

[adidoit]

Yes. I do genuinely think AI can be amazing and I quit my job to build something that I hope will be a positive use case of AI

But these stats are troubling

Not to mention a backlash is brewing amongst people who both don't want to use AI and don't want their world to change so quickly.