After studying 400 years and 30 bubbles, why does this $54 billion hedge fund still firmly believe in AI?

As the alarm bells about the artificial intelligence bubble grow louder, hedge fund giant Coatue Management, which manages $54 billion in assets, has reached a more confident conclusion after an in-depth study of 400 years of market bubble history: betting on AI remains the right choice.

According to a report by MarketWatch on the 27th, Coatue, led by Philippe Laffont, disclosed its research conclusions in a presentation on October 16. The firm systematically analyzed over 30 bubble events over the past 400 years and categorized them across more than 30 dimensions, including application penetration rates, leverage levels, and market concentration.

While acknowledging that the current AI boom has some concerning characteristics, Coatue explicitly refuted the bubble theory. The fund believes that the long-term fundamentals of AI remain strong enough to support its investment logic. Based on this judgment, Coatue presented two possibilities: the first is the "AI boom" scenario, where AI successfully enhances productivity and GDP while inflation is controlled, leading technology stocks to continue leading the market, with a probability of two-thirds for this scenario.

In contrast, Coatue believes the risk of an AI bubble bursting, leading to a stock market crash and economic recession, is only one-third.

Historical Comparison: How is AI Development Different from Historical Bubbles?

Coatue's core argument is that the current development of AI fundamentally differs from historical speculative bubbles in key indicators. First, in terms of application penetration speed, the adoption rate of AI since its inception far exceeds that of personal computers (PCs) or the internet.

Secondly, although capital expenditures are large and continuously growing, the funding primarily comes from healthy operating cash flows rather than excessive reliance on leverage. In terms of valuation, the current price-to-earnings (P/E) ratios of AI leaders have not reached the frenzied highs seen during the internet bubble. At the same time, Coatue points out that market concentration itself is not necessarily a negative indicator. The fund also cites cloud computing as an example, noting that such disruptive technologies often take years to achieve positive returns on invested capital (ROIC), and AI may follow a similar path.

Coatue believes that the true impact of AI is difficult to fully quantify, which is one reason its value is easily underestimated. Some impacts are direct, such as companies reducing labor costs through AI; but others are harder to measure, like improvements in employee productivity. The fund believes that the profit growth driven by AI over the next 5 to 10 years will be sufficient to support the current massive investments.

The report also cited earnings call content from Amazon and Shopify, pointing out that the AI boom is significantly driving growth in areas such as e-commerce and advertising. Its impact has extended beyond the tech industry itself, with companies in various fields, such as trucking company C.H. Robinson and fintech company Rocket Cos., also promoting the business advantages brought by AI.

Portfolio Reflects AI Belief

Before reaching a bullish conclusion, Coatue did not shy away from the risk signals emerging from the AI boom. The fund acknowledged several key issues in its document, including the "overly large" scale of leading companies in the AI sector, capital expenditure levels exceeding those during the internet bubble, and the slowing pace of AI application adoption.

Additionally, the fund noted signs of deceleration in data center growth and raised questions about the financing models of suppliers within the industry. These factors share similarities with characteristics of historical bubbles and constitute the main sources of current market concerns. However, Coatue believes that the differences between this round of the AI boom and historical bubbles are more critical than these similarities.

Although the presentation did not disclose Coatue's current specific position adjustments, its publicly available holding data clearly reflects a strong belief in AI.

According to the fund's submitted second-quarter 13-F holding report, its portfolio shows a distinct AI inclination. Its major holdings include cloud service provider CoreWeave, Meta Platforms, Amazon, GE Vernova, and Microsoft. Furthermore, the fund allocated 5% of its position to companies closely related to the AI ecosystem, including energy supplier Constellation Energy, chip manufacturer TSMC, and NVIDIA