The artificial intelligence boom seems unstoppable, but a growing number of investors and other observers worry it could be a bubble about to burst.
After skyrocketing more than 50% from April lows, the tech-heavy Nasdaq composite experienced a decline of close to 5% this month. Investors are concerned it could take longer than expected to see big profits from the trillions of dollars they’ve poured into technology’s next wave.
Those who have been around long enough say some of the enthusiasm feels like the dot-com boom and bust of the turn of the century. Optimists say this time is different.
AI chipmaker Nvidia has led the stock market rally, becoming the world’s most valuable company on the back of the AI enthusiasm. The Santa Clara-based company makes specialized computer chips that tech companies use for AI model training, data centers, robotics and more.
AI bulls and bears waited to hear what Nvidia had to say about the state of the business in its quarterly earnings report on Wednesday. The company helped keep the hope alive by announcing that its profit as well as its outlook on the future were better than analysts had expected. Its shares jumped more than 4% in early after-hours trading.
“There’s been a lot of talk about an AI bubble. From our vantage point, we see something very different,” said Nvidia Chief Executive Jensen Huang, in a call following the results. “As a reminder, Nvidia is unlike any other accelerator. We excel at every phase of AI.”
From social media to self-driving cars, Huang emphasized how AI that can generate content and perform tasks without human insight will affect every industry.
Nvidia’s results could help resuscitate the AI rally. However, investors and analysts are still anxious about whether the high stock prices are justified for all the different companies that are in the AI race. After the dot-com bubble, a lot of companies disappeared, but those that survived are now among the largest, most profitable companies in the world.
The sky-high valuations of the Silicon Valley tech behemoth and other big players in the AI race have made investors ponder whether and when their bet on technology’s future will pay off. The fates of tech companies have become more intertwined as they pour hundreds of billions of dollars into each other, as well as data centers, AI research and lucrative employee compensation packages.
In September, Nvidia said it plans to invest up to $100 billion in ChatGPT maker OpenAI to fund the company’s massive buildout of data centers that house equipment used to store and process the trove of information needed to power AI systems. OpenAI also committed to buying Nvidia chips for at least 10 gigawatts of AI data centers.
Total capital expenditure required to serve OpenAI’s computational needs could reach $130 billion by 2027, according to a New Street Research analyst note in October. This means OpenAI alone could spend $52 billion on Nvidia technology.
Despite its sky-high valuation of roughly $500 billion, OpenAI is losing billions of dollars as it continues to spend on infrastructure, computing power and other expenses.
“Whether we burn $500 million a year or $5 billion or $50 billion a year, I don’t care. I genuinely don’t,” OpenAI CEO Sam Altman said at a Stanford talk last year. “It’s going to be expensive. It’s totally worth it.”
But as losses pile up, anxiety among investors has climbed.
Roughly 45% of global fund managers surveyed by Bank of America said there was an “AI bubble” that could adversely impact the economy and the markets.
The debate about whether there’s an AI bubble will continue.
Samuel Hammond, chief economist at the Foundation for American Innovation, said he doesn’t think that AI investments are in a bubble. But there could be winners and losers.
“Companies that get a massive valuation just for putting AI in their mission statement but fail to deliver could still go to zero,” he said. “But most of the stock market’s growth is being driven by the large-cap tech stocks like Nvidia and Google.”
Tech companies are largely funding these massive data center projects with equity — not debt — which reduces the likelihood of this being a bubble on the verge of popping, Hammond said.
Strategists at investment bank Goldman Sachs said in an October paper that even though there’s a risk that tech companies are overinvesting, they have generated growth in profits and have strong balance sheets.
“While the success of dominant technology companies is clear to see, this doesn’t necessarily mean that there is a bubble in the market that is in imminent danger of bursting,” the paper said.
Gary Smith, an economics professor at Pomona College and author, has warned about an AI bubble. He pointed to OpenAI’s losses, circular financing among tech companies and AI’s limits.
“OpenAI is certainly in a highly fragile situation,” he wrote in an op-ed with Jeffrey Funk, an author and retired professor, on MarketWatch. “When the AI bubble pops, it will be one of the first casualties.”
Some analysts have compared the data center buildout to the 1990s telecom boom when companies invested $500 billion to lay fiber optic cables to meet rapid internet adoption, creating a glut of dark fiber that sat idle for years as physical capacity outpaced actual traffic.
Google CEO Sundar Pichai told the BBC there are times when the tech industry has “overshoot.”
“We can look back at the internet right now. There was clearly a lot of excess investment,” he said. “But none of us would question whether the internet was profound.”
The post Is there an AI bubble and has it started to burst? appeared first on Los Angeles Times.
