KKR Portfolio

KKR & Co, Inc the global investment management firm that focuses on private equity, real estate and private credit and lending has in the past 7 years developed the strategy of owning insurance companies, namely Global Atlantic and using the insurance premiums proceeds as long-term investment capital for its private equity, real estate and private credit, according to Wolfteam Ltd.'s analysis.

The problem with private equity, real estate and private credit and the pension funds, endowments and insurance companies investing in such funds is that the capital is not completely permanent. The aforementioned institutional investors want their capital back in 7 to 10 years, usually.

So KKR & Co and other private equity funds by default operate in the mid-term by structuring funds with 7 to 10 years life span. This limits their investment results' potential.

KKR & Co decided to buy into Global Atlantic and use the insurance premiums as permanent capital for private equity, real estate and private credit of foreign funds and its proprietary investments. Here is the distribution of KKR & Co assets under management:

Assets Under Management

• AUM of $601 billion, up 16% year-over-year, with $32 billion of organic new capital raised in the quarter and $108 billion in the
LTM
• Fee Paying AUM of $487 billion, up 16% year-over-year, with $29 billion of organic new capital raised in the quarter and $109
billion in the LTM
• Perpetual Capital of $250 billion, up 25% year-over-year driven primarily by the organic growth of Global Atlantic. Perpetual
capital represents 42% of AUM and 50% of FPAUM 

So called perpetual assets under management are the insurance premiums from KKR's Global Atlantic insurance subsidiary, which go also into private equity, real estate and private credit but are sort of a proprietary form of investment, This investment business model is modeled after the resounding success of Berkshire Hathaway, owned to a large part and managed by Warren Buffett. Berkshire Hathaway surpassed 1 trln. USD in market capitalization this past Friday.

So KKR's Global Atlantic makes for the lion share of KKR's revenue, before netting due to GAAP:

GAAP Net Income (Loss) Attributable to KKR & Co. Inc. Common Stockholders was $0.7 billion for the quarter and
$1.4 billion YTD.
($ in thousands, except per share data) 2Q'23 2Q'24 2Q'23 YTD 2Q'24 YTD
Revenues
Asset Management and Strategic Holdings $ 1,451,344 $ 1,560,449 $ 2,577,378 $ 3,516,917
Insurance 2,175,174 2,611,461 4,176,622 10,311,731
Total Revenues $ 3,626,518 $ 4,171,910 $ 6,754,000 $ 13,828,648
Expenses
Asset Management and Strategic Holdings $ 970,293 $ 1,222,960 $ 1,781,801 $ 2,840,929
Insurance 2,152,189 2,723,369 4,200,764 10,418,344
Total Expenses $ 3,122,482 $ 3,946,329 $ 5,982,565 $ 13,259,273
Total Investment Income (Loss) - Asset Management and Strategic Holdings $ 946,977 $ 984,624 $ 1,088,013 $ 2,003,881
Income Tax E xpens e (B enefit) 324,955 216,969 473,702 486,170
R edeemable Noncontrolling Interes ts (1,740) 29,666 (9,043) 62,344
Noncontrolling Interes ts 266,086 295,644 193,083 674,602
P referred S tock D ividends 17,249 — 34,499 —
Net Income (Loss) - KKR Common Stockholders $ 844,463 $ 667,926 $ 1,167,207 $ 1,350,140
Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Common Stock
Basic $ 0.98 $ 0.75 $ 1.36 $ 1.52
Diluted $ 0.94 $ 0.72 $ 1.32 $ 1.45
Weighted Average Shares of Common Stock Outstanding
Basic 861,553,274 887,394,513 861,332,121 886,200,169
Diluted 912,147,881 932,046,386 913,068,567 928,593,777

The Global Atlantic stable, almost perpetual stream of insurance premiums makes KKR very successful boasting 110 billion USD in market capitalization.

KKR Investments

 

KKR & Co, Inc.,  the global investment management firms has its investments in three main areas. Namely private equity, real estate, credit and liquid strategies and insurance. Insurance is actually not a classic segment in the classic private equity sense of the word. More it is a proprietary holding position in insurance. Insurance business is characterized by steady inflow of insurance premiums, which come from the insured people and corporations.

KKR uses these stable, long-term, freely flowing premiums to invest in private equity, real estate and private credit assets akin to the way Warren Buffett does that with the controlled by him conglomerate Berkshire Hathaway, which has a large insurance business. Actually, KKR's insurance business brings the most revenue. The insurance premiums, however, have to be netted according to international GAAP.

Here is an excerpt from KKR's second quarter earnings statement:

Second Quarter 2024 GAAP Results (Unaudited)
GAAP Net Income (Loss) Attributable to KKR & Co. Inc. Common Stockholders was $0.7 billion for the quarter and
$1.4 billion YTD.
($ in thousands, except per share data) 2Q'23 2Q'24 2Q'23 YTD 2Q'24 YTD
Revenues
Asset Management and Strategic Holdings $ 1,451,344 $ 1,560,449 $ 2,577,378 $ 3,516,917
Insurance 2,175,174 2,611,461 4,176,622 10,311,731
Total Revenues $ 3,626,518 $ 4,171,910 $ 6,754,000 $ 13,828,648
Expenses
Asset Management and Strategic Holdings $ 970,293 $ 1,222,960 $ 1,781,801 $ 2,840,929
Insurance 2,152,189 2,723,369 4,200,764 10,418,344
Total Expenses $ 3,122,482 $ 3,946,329 $ 5,982,565 $ 13,259,273
Total Investment Income (Loss) - Asset Management and Strategic Holdings $ 946,977 $ 984,624 $ 1,088,013 $ 2,003,881
Income Tax E xpens e (B enefit) 324,955 216,969 473,702 486,170
R edeemable Noncontrolling Interes ts (1,740) 29,666 (9,043) 62,344
Noncontrolling Interes ts 266,086 295,644 193,083 674,602
P referred S tock D ividends 17,249 — 34,499 —
Net Income (Loss) - KKR Common Stockholders $ 844,463 $ 667,926 $ 1,167,207 $ 1,350,140
Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Common Stock
Basic $ 0.98 $ 0.75 $ 1.36 $ 1.52
Diluted $ 0.94 $ 0.72 $ 1.32 $ 1.45
Weighted Average Shares of Common Stock Outstanding
Basic 861,553,274 887,394,513 861,332,121 886,200,169
Diluted 912,147,881 932,046,386 913,068,567 928,593,777

 KKR's market capitalization of 108.47 billion USD reflects the success of KKR's strategy of using its insurance premiums to invest in private equity, real estate and credit and liquid strategies.

Bavarian Nordic Valuation

 

Bavarian Nordic, the Danish company, which is the only holder of a vaccine against monkey pox is undervalued, according to Wolfteam Ltd.'s projections and estimates.

Monkey pox might not spread as much and as fast or be as deadly as the coronavirus, but monkey pox could well spread. Bavarian Nordic holds a monopoly on cure from monkey pox with its vaccine.

Bavarian Nordic intrinsic worth could reach 30 billion USD if monkey pox spread to a mid level. Bavarian Nordic's current market capitalization is 3.2 billion USD.

KKR Investment Portfolio

KKR & Co, Inc the global investment management firm has most of its assets under management in private equity, followed by real estate and private credit and liquid strategies business line. KKR's asset management mix is the sole reason of its out-performance, in Wolfteam Ltd.'s view.

The earnings from the three segments follow a similar order.

The revenue from the insurance unit, not netted, however, dwarfs the other three segments.

The following is an excerpt from KKR's second quarter 2024 earnings statement.

($ in thousands, except per share data) 2Q'23 2Q'24 2Q'23 YTD 2Q'24 YTD
Revenues
Asset Management and Strategic Holdings $ 1,451,344 $ 1,560,449 $ 2,577,378 $ 3,516,917
Insurance 2,175,174 2,611,461 4,176,622 10,311,731
Total Revenues $ 3,626,518 $ 4,171,910 $ 6,754,000 $ 13,828,648
Expenses
Asset Management and Strategic Holdings $ 970,293 $ 1,222,960 $ 1,781,801 $ 2,840,929
Insurance 2,152,189 2,723,369 4,200,764 10,418,344
Total Expenses $ 3,122,482 $ 3,946,329 $ 5,982,565 $ 13,259,273
Total Investment Income (Loss) - Asset Management and Strategic Holdings $ 946,977 $ 984,624 $ 1,088,013 $ 2,003,881
Income Tax E xpens e (B enefit) 324,955 216,969 473,702 486,170
R edeemable Noncontrolling Interes ts (1,740) 29,666 (9,043) 62,344
Noncontrolling Interes ts 266,086 295,644 193,083 674,602
P referred S tock D ividends 17,249 — 34,499 —
Net Income (Loss) - KKR Common Stockholders $ 844,463 $ 667,926 $ 1,167,207 $ 1,350,140
Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Common Stock
Basic $ 0.98 $ 0.75 $ 1.36 $ 1.52
Diluted $ 0.94 $ 0.72 $ 1.32 $ 1.45
Weighted Average Shares of Common Stock Outstanding
Basic 861,553,274 887,394,513 861,332,121 886,200,169
Diluted 912,147,881 932,046,386 913,068,567 928,593,777

GAAP reconciled the revenues from insurance are much less, because they are netted from costs.

KKR are using the stable, long-term premiums from the insurance segment to finance investments in private equity, real estate and private credit.

The strategy works quite well as evidenced by the 106.89 billion market capitalization of KKR.

That said, private equity remains the largest business line in terms of core revenue, followed by real estate and private credit and the principal activities business.

KKR has raised multitudes of funds with emphasis on North America, but also some very large European and Asian funds. KKR has raised large technology and healthcare funds.

KKR Investment Strategy

KKR has put an emphasis on insurance in its latest reported quarters in order to yield long-term capital which to invest in its private equity and private credit business along the lines of Warren Buffett's Berkshire Hathaway conglomerate. 

Here is an excerpt from KKR's  second quarter 2024 earnings statement.

Non-GAAP measures net out the insurance fees, however. 

The stable insurance premiums insure the longevity of KKR and the long-term viability of the private equity and private credit business.

33
Reconciliation of GAAP to Non-GAAP Measures (Unaudited)
(1) Represents equity-based compensation expense in connection with non-dilutive share grants from outstanding units in KKR Holdings.
(2) Amounts represent the portion allocable to KKR.
($ in thousands) 2Q'23 2Q'24 2Q'23 YTD 2Q'24 YTD 2Q'23 LTM 2Q'24 LTM
Net Income (L os s ) - K K R C ommon S tockholders $ 844,463 $ 667,926 $ 1,167,207 $ 1,350,140 $ 1,320,954 $ 3,863,447
Preferred Stock Dividends 17,249 — 34,499 — 68,999 17,248
Net Income (Loss) Attributable to Noncontrolling Interests 264,346 325,310 184,040 736,946 139,873 2,177,731
Income Tax Expense (Benefit) 324,955 216,969 473,702 486,170 664,955 1,209,991
Income (Loss) Before Tax (GAAP) $ 1,451,013 $ 1,210,205 $ 1,859,448 $ 2,573,256 $ 2,194,781 $ 7,268,417
Impact of Consolidation and Other (257,366) (151,775) (163,855) (343,294) (35,905) (1,749,030)
Equity-based Compensation - KKR Holdings(1) — — — — 19,500 —
Income Taxes on Adjusted Earnings (171,542) (238,244) (344,599) (454,610) (783,019) (873,393)
Asset Management Adjustments:
Unrealized (Gains) Losses (235,521) (76,175) (115,587) (475,253) 809,787 (1,203,293)
Unrealized Carried Interest (435,495) (190,143) (638,154) (1,136,959) 741,805 (2,155,779)
Unrealized Carried Interest Compensation 195,361 153,003 279,191 910,455 (313,979) 1,424,022
Transaction-related and Non-operating Items 7,192 1,308 13,999 62,983 38,424 80,789
Equity-based Compensation 45,261 66,535 104,278 140,312 209,341 266,892
Equity-based Compensation - Performance based 63,654 83,050 130,927 163,618 252,072 304,649
Strategic Holdings Adjustments:
Unrealized (Gains) Losses (222,790) (344,709) (243,397) (417,966) (667,717) (865,876)
Insurance Adjustments(2):
(Gains) Losses from Investments(2) 125,483 312,614 256,597 559,531 427,307 666,890
Non-operating Changes in Policy Liabilities and Derivatives(2) 57,463 106,465 163,954 180,328 22,242 245,303
Transaction-related and Non-operating Items(2) 3,199 — 3,199 — 12,445 4,148
Equity-based and Other Compensation(2) 23,898 35,323 60,291 64,389 120,837 75,677
Amortization of Acquired Intangibles(2) 2,794 4,412 5,588 8,824 11,014 14,411
Adjusted Net Income $ 652,604 $ 971,869 $ 1,371,880 $ 1,835,614 $ 3,058,935 $ 3,503,827
Interest Expense, Net 95,357 77,101 177,597 149,908 331,560 298,230
Net Income Attributable to Noncontrolling Interests 6,118 2,851 11,744 4,774 22,793 18,980
Income Taxes on Adjusted Earnings 171,542 238,244 344,599 454,610 783,019 873,393
Total Segment Earnings $ 925,621 $ 1,290,065 $ 1,905,820 $ 2,444,906 $ 4,196,307 $ 4,694,430
Net Realized Performance Income (52,249) (122,839) (113,638) (200,837) (474,768) (486,148)
Net Realized Investment Income (100,839) (117,764) (265,959) (232,306) (673,606) (507,788)
Total Operating Earnings $ 772,533 $ 1,049,462 $ 1,526,223 $ 2,011,763 $ 3,047,933 $ 3,700,494
Strategic Holdings Operating Earnings — (40,852) — (61,572) (20,316) (76,103)
Insurance Operating Earnings (170,224) (253,213) (375,336) (526,053) (775,536) (967,354)
Fee Related Earnings $ 602,309 $ 755,397 $ 1,150,887 $ 1,424,138 $ 2,252,081 $ 2,657,037

The private equity asset have a natural inclination towards North America where are the biggest funds. 2006 one of the biggest funds was raised:

23
Investment Vehicle Summary
($ in millions)
Investment Period Amount
Start
Date
End
Date Commitment Uncalled
Commitments Invested Realized Remaining
Cost Remaining
Fair Value
PRIVATE EQUITY BUSINESS LINE
North America Fund XIII 8/2021 8/2027 $ 18,400 $ 8,200 $ 10,199 $ 12 $ 9,947 $ 12,276
Americas Fund XII 5/2017 5/2021 13,500 1,614 12,493 11,270 9,234 17,736
North America Fund XI 11/2012 1/2017 8,718 48 10,165 23,097 2,526 3,283
2006 Fund(1) 9/2006 9/2012 17,642 — 17,309 37,423 — —
Millennium Fund(1) 12/2002 12/2008 6,000 — 6,000 14,129 — —
Ascendant Fund 6/2022 6/2028 4,097 4,097 — — — —
European Fund VI 6/2022 6/2028 7,437 5,774 1,663 — 1,663 1,028
European Fund V 7/2019 2/2022 6,365 729 5,751 1,320 5,486 7,247
European Fund IV 2/2015 3/2019 3,512 20 3,643 5,726 1,621 2,608
European Fund III(1) 3/2008 3/2014 5,506 146 5,360 10,625 151 20
European Fund II(1) 11/2005 10/2008 5,751 — 5,751 8,533 — —
Asian Fund IV 7/2020 7/2026 14,735 8,321 7,129 715 6,893 10,107
Asian Fund III 8/2017 7/2020 9,000 1,328 8,192 6,658 6,602 13,298
Asian Fund II 10/2013 3/2017 5,825 — 7,494 6,694 2,697 1,971
Asian Fund(1) 7/2007 4/2013 3,983 — 3,974 8,728 — —
Next Generation Technology Growth Fund III 11/2022 11/2028 2,740 2,321 419 — 419 490
Next Generation Technology Growth Fund II 12/2019 5/2022 2,088 88 2,197 548 1,952 3,221
Next Generation Technology Growth Fund 3/2016 12/2019 659 4 670 1,235 258 871
Health Care Strategic Growth Fund II 5/2021 5/2027 3,789 2,498 1,291 — 1,291 1,414
Health Care Strategic Growth Fund 12/2016 4/2021 1,331 111 1,350 283 1,108 1,853
Global Impact Fund II 6/2022 6/2028 2,704 1,885 819 — 819 744
Global Impact Fund 2/2019 3/2022 1,242 211 1,207 483 1,028 1,732
Co-Investment Vehicles and Other Various Various 22,741 3,279 20,038 10,486 14,400 17,461
Core Investors II 8/2022 8/2027 11,814 8,963 2,851 — 2,851 3,241
Core Investors I 2/2018 8/2022 8,500 23 9,369 1,106 8,469 16,312
Other Core Vehicles Various Various 5,133 1,248 3,955 1,444 3,491 6,272
Unallocated Commitments(2) N/A N/A 3,969 3,969 — — — —
Total Private Equity $ 197,181 $ 54,877 $ 149,289 $ 150,515 $ 82,906 $ 123,185

Private equity is the largest net asset management fees generator for KKR. KKR has its roots in private equity and continues to develop the segment. Raising big funds and collecting management, performance fees and principal activities fees.

KKR Strategy And Warren Buffett's Berkshire Hathaway

KKR & Co Inc, the private equity investment investment group is trying to model its structure along the lines of Warren Buffett's investment conglomerate Berkshire Hathaway, by using the stable premiums coming from insurance to invest long-term in private equity and credit and thus yield better than the private equity industry results, in Wolfteam, Ltd.'s view.

Revenues from insurance for KKR surpass asset management revenues by almost three times in the last reported 2nd quarter of 2024.

($ in thousands, except per share data) 2Q'23 2Q'24 2Q'23 YTD 2Q'24 YTD
Revenues
Asset Management and Strategic Holdings $ 1,451,344 $ 1,560,449 $ 2,577,378 $ 3,516,917
Insurance 2,175,174 2,611,461 4,176,622 10,311,731
Total Revenues $ 3,626,518 $ 4,171,910 $ 6,754,000 $ 13,828,648
Expenses
Asset Management and Strategic Holdings $ 970,293 $ 1,222,960 $ 1,781,801 $ 2,840,929
Insurance 2,152,189 2,723,369 4,200,764 10,418,344
Total Expenses $ 3,122,482 $ 3,946,329 $ 5,982,565 $ 13,259,273
Total Investment Income (Loss) - Asset Management and Strategic Holdings $ 946,977 $ 984,624 $ 1,088,013 $ 2,003,881
Income Tax E xpens e (B enefit) 324,955 216,969 473,702 486,170
R edeemable Noncontrolling Interes ts (1,740) 29,666 (9,043) 62,344
Noncontrolling Interes ts 266,086 295,644 193,083 674,602
P referred S tock D ividends 17,249 — 34,499 —
Net Income (Loss) - KKR Common Stockholders $ 844,463 $ 667,926 $ 1,167,207 $ 1,350,140
Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Common Stock
Basic $ 0.98 $ 0.75 $ 1.36 $ 1.52
Diluted $ 0.94 $ 0.72 $ 1.32 $ 1.45
Weighted Average Shares of Common Stock Outstanding
Basic 861,553,274 887,394,513 861,332,121 886,200,169
Diluted 912,147,881 932,046,386 913,068,567 928,593,77

The stable insurance premiums ensure a stable business model for KKR. By getting the stable flows of insurance premiums KKR can invest in its private equity and private credit/lending business with a long-term perspective.

This long-term value creation is reflected in the 102.26 billion USD market capitalization of KKR. KKR's 8 billion USD revenue and net profit of 2.5 billion USD on average for the last 5 years also speaks volumes of the shrewd execution of the management strategy of KKR.

Warren Buffett on a yearly weighted average is arguably the world's richest man for the last 20 years. Which speaks volumes of Buffett's insurance lead business strategy application at the lead and controlled by Warren Buffett Berkshire Hathaway holding. Far from a copycat KKR & Co, Inc is executing a shrewd insurance lead private equity and private credit lead business and asset management strategy.

NVIDIA Valuation. Three AI Scenarios

In the negative scenario for AI, the poster stock of AI's market capitalization could fall to 700 billion USD from the current 2.69 trillion USD market capitalization. In a negative scenario, AI will change our world and the global economy, but figuratively speaking to the tune of only 20 % of what Wall Street equity research analysts, investors and technologists are currently extrapolating.

In the neutral scenario, where AI changes the economy to 50 % of what people are expecting, the current 2.69 trillion USD of NVIDIA market capitalization could prove a good pivot point where NVIDIA's intrinsic worth lies.

In the positive scenario where artificial intelligence, AI lives to 100 % or even 120 % of market expectations, NVIDIA's intrinsic worth could prove around 8 trillion USD. In such an optimistic scenario AI will profoundly change the way we work, live, study, communicate etc.

AI Stocks Could Drop 30 % More. In the Long-Tem AI Stocks Are Undervalued

 

The Magnificent 7 AI stocks, namely Apple, Microsoft, Alphabet, Amazon, Meta, NVIDIA and Tesla could fall 30 % more from current levels.

In the long-term, all Magnificent 7 AI stocks could prove undervalued on AI's potential. Outside Tesla, which has to achieve a technological breakthrough to become sustainably profitable, in order to remain a viable going concern company long-term.

Artificial intelligence, AI's potential could prove larger than even the internet, since AI's main fuel is data gathered from the internet. AI's potential has 10-20 years more to come full fruition, in Wolfteam Ltd.'s view.

That is why, AI and AI stocks could prove well undervalued in the long-term.

Alphabet, Google Owner Is Undervalued. Even After The Antitrust Lawsuit Court Verdict

Alphabet Inc, the Google owner company lost an antitrust lawsuit alleging it wields too high market power over search.

The implications of the lost antitrust lawsuit by Alphabet, Google owner would take years to unfold.

That said, Alphabet Inc, via Google would continue to hold a large grip over search queries globally. Simply said, Google possesses the largest amount of information on search queries which power its artificial intelligence search algorithms.

It is interesting to note that the leading proponent from the private sector that Google has almost monopoly power over search is Microsoft. Microsoft's CEO Satya Nadella was even one of the main witnesses of the prosecution. Satya Nadella testified in the lawsuit against Alphabet that there is a danger that Alphabet, via Google could hold monopoly power over artificial intelligence, AI technology in the future, because the information Google possesses off which Google's artificial intelligence, AI algorithms feed to improve themselves and the predictive analytics that could provide Alphabet with  strategic advantage.

 

Although the above claim by Microsoft's CEO Satya Nadella sounds legitimate, nothing stops Microsoft form also using search query results to load on users' information to train its own artificial intelligence, AI algorithms. Some analysts claim that for year Microsoft has under-invested in its Bing search engine and in the underlying algorithms, which made Bing inferior to Google.

Part of the reason of the possible under-investment by Microsoft in Bing was the fact that Microsoft wanted to develop its hardware business, namely the production of mobile phones, tablet computers and laptops under the own Microsoft brand. Microsoft wanted apparently to measure up to the huge success of Apple, which has extremely successfully combined, vertically integrated mobile phones, tablets and Macintosh computers hardware production with its own software operation systems for its hardware. In addition, Apple boasts it does not collect information on its users and Apple does not serve user informed internet advertisements like Alphabet via Google of Meta Platforms vi Facebook, Whats App, Messenger, Instagram. Microsoft tried to circumvent serving users advertisements by buying into a 49 % share of OpenAI, producer of ChatGPT Large Language AI Model and ultimately SearchGPT. But legally this move of Microsoft looks borderline, if Microsoft wants to argue it does not serve advertisements by harvesting users' information and thus drive on its tablet and laptop PC hardware business.

Actually, Alphabet's Google has already extracted loads of information to ensure near term dominance in search. That said, however, Alphabet has to remain vigilant, on its toes and develop its artificial intelligence, AI algorithms at lightning speed if it wants to remain long-term viable. And this goes beyond the standard econometrics, statistics models of linear regression, maximum likelihood and logistic regression. 

Actually, the court verdict has to do with the way Alphabet packages in its Google search engine with its operating system Android, packages in the Android modifications of Samsung, Sony and Motorola, packages in the Google search engine with the Mozilla Browser and in Apple's Safari internet browser. Much like Microsoft used to package its internet browser Internet Explorer first, than Edge in the Microsoft Windows operating system. And Microsoft was nearly broken up due to such allegedly too high wielding market power practices.

The lawsuit against Alphabet remedy actions are yet to be decided upon and published, but Alphabet seems to have hardly pressed exclusivity on Mozilla Firefox or Apple's Safari internet browser or the Android modifications of Samsung, Sony and Motorola. At least judging by public information.

 

In Wolfteam Ltd.'s view Alphabet, via Google gathered too much initial speed, because the search engine Google was viewed as that much better as the then leader Yahoo's search engine. The initial 7 years since 2003 provided Google with huge second mover advantage and first by technology advantage leap. Google was able to introduce artificial intelligence, AI models like linear regression, maximum likelihood and logistic regression, neural networks into its search making its models fully artificial intelligence, AI. The AI automation of Google's search engine models let Alphabet via Google gather even more speed and move much further ahead of its competitors. Microsoft launched Bing relatively late, still being wary of tainting a possible future successful hardware business by user information mishandling. And Microsoft did not focus solely on Bing, while Alphabet's initial and later focus was entirely on Google and later came AI. Alphabet later tried to diversify with its other bets. Alphabet also owns YouTube which is serving videos via artificial intelligence, AI and holds huge amount of unlocked value. Since videos, not only short form video reels is the current and for the next decade mega trend. The largest trend for the next 20-30 years is of course artificial intelligence, AI.

And Alphabet via the Google's artificial intelligence, AI trained algorithms holds a superior hand currently. According to many Wall Street research analysts, investors, technologists, technology analysts, the general technology and broader public, at least.

Alphabet's intrinsic value is 7 trillion USD, according to Wolfteam Ltd.'s projections and estimates.

How To Value AI? AI Valuation

 

The best way to value artificial intelligence or AI is via the discounted cash flows it can bring, in Wolfteam Ltd.'s view.

The problem or issue is that AI is currently a set of models. So the cash flows are coming from disrupting, upending, transforming or in short changing certain industries. And here comes the interesting part. Almost all sectors of the economy yield themselves to transformation or even radical, revolutionary change. The discounted cash flows narrative goes as follows - you find the target market, industry size, estimate what percentage of market share can the firm take and discount the potential profits to the present dividing by interest rates levels in the denominator and adding the growth rate of the industry in the numerator. Loosely speaking. And hence the name discounted cash flows.

The interesting thing is usually people would first consider technology as the main industry AI can change. And hence the discounted cash flows flow from the size of the technology industry. But even at this level the transformation potential of AI is so fluid that one finds it very difficult to estimate both the market size and the market share of an incumbent technology firm. But if one defines narrowly information technology as the use of computers or computer calculations to model processes then every industry is at least partly a technology industry. So basically now one has to look at all industries taken together to determine a value for AI. 

Currently, as of 2022 World GDP stands at 101.3 billion USD. If an incumbent firm takes a 10 % share of the global market, this would equate at loosely speaking, estimating 10.13 trillion USD in yearly revenue. If one implies the typical for  information technology firms 20 % net profit margin this would give 2 trillion USDs in yearly profits. And if one applies an information technology currently typical current Price/Earnings ratio of 35, this would give a possible market capitalization of 70 trillion USD of our hypothetical AI technology leader firm, which is so influential it disrupts all 10 aggregates sectors of the economy via AI models or AI calculation, computing power. Have in mind that here for brevity company multiples like Price/Earnings, Price/Sales, Price/Book value have been used.

70 trillion USD is more than the whole US stock market value. This might sound exaggerated, but so might the AI potential sound exaggerated. The first industrial revolution was the steam powered enterprise, the second was the industrial revolution, the third industrial revolution in 2000s was the advent of the internet and now the fourth industrial revolution is on the way via the artificial intelligence, AI transformation of industries via the use of technology and mathematical models or AI through which the productivity of all 10 industrial sectors of the global economy jumps exponentially. 

And given the size of the global economy at 101 trillion USDs, the potential change power of the fourth industrial revolution or AI, artificial intelligence models is measured in tens of trillions of USDs.

There are likely to be of course, several big disrupting firms like Cisco, Amazon and Google in the 2000s internet boom this time around, which can all take share of the 70 trillion USD in value created given above as exemplary calculations. Actually if the global GDP is 101.3 trillion USDs in 2022, then the value of all firms in the global economy could well equate to 340 trillion USDs or more, which only speaks in trillion of USDs of volume of the potential disruption opportunities for AI.

AI's disruption potential in new potential algorithms, models to perform various tasks to increase productivity. AI harnesses the mathematical power of centuries of mathematical thought and its branch statistics or machine learning as it is called modern day. New, breakthrough algorithms could shorten and enhance productive tasks like analysis and modelling and thus take the planning and execution in all 10 global sub-sectors to new, unseen, never thought of before levels.

Since AI stands on the shoulders of the first industrial revolution - the steam, the second industrial revolution - the industry processes and the third industrial revolution - the internet, the disruption, transformation, change for the better of AI could be that much bigger.

If one estimates the achieved profits, the correct growth rate and the interest rates prevailing in the economy during the AI transformation, one can closely model the value of the winners and losers from the fourth industrial AI revolution.

What is more, via careful analysis and insightful forecasting the global welfare could be significantly improved via AI's potential.

The Federal Reserve Could Cut Interest Rates In September 2024

 

It seems already a done deal, that the Federal Reserve will cut rates in September by 0.25 %.

Actually, the coming interest rate cutting cycle by the central bank of the United States would not be long or durable, in Wolfteam Ltd.'s view.

Prices are still high at the store and the sporadic discounts by the stores are doing little to make goods more affordable. Inflation is not rising, but prices remain high.

The Federal Reserve will sooner rather than later have to do something about this, namely to start raising rates back again.

But for now we are in for a mini rate cutting cycle.