Is the AI bubble about to pop? This relatively new question is of concern to most investors. The AI bubble refers to the massive and rapid pace of investments in artificial intelligence in the past couple of years. The concern is that these large investments have inflated company valuations that are not supported by actual revenue or future potential.
These concerns are further supported by OpenAI Chief Executive Officer Sam Altman, who stated, “[a]re we in a phase where investors as a whole are overexcited about AI? My opinion is yes,” and added that “if you look at most of the bubbles in history, like the tech bubble, there was a real thing. Tech was really important. The internet was a really big deal. People got overexcited.”
Goldman Sachs CEO David Solomon voiced similar concerns that “[w]henever we’ve historically had a significant acceleration in a new technology that creates a lot of capital formation and therefore lots of interesting new companies around it, you generally see the market run ahead of the potential, because there are going to be winners and losers.”
No one wants to miss out on the next Facebook, Netflix, Apple and most recently, NVIDIA. This causes investors to continue to pour their money into these companies, hoping they will be in a position to boast about having invested in the next Palantir before its potential is realized.
Altman also speaks to these ideas on the growth potential, asserting that, “[s]omeone is going to lose a phenomenal amount of money. We don’t know who, and a lot of people are going to make a phenomenal amount of money.”
These spews of cash into AI companies are leading to a significant overvaluation. Jeff Bezos, CEO of Amazon, further supports this claim, saying, “When people get very excited, as they are today about artificial intelligence, for example … every experiment gets funded, every company gets funded, the good ideas and the bad ideas.”
The AI bubble will collapse, but this may be a wake-up call, rather than a complete market crash. Investors are too happy, and there will be, like Solomon said, a lot of losers. The people who lose money should internalize losses as a lesson for other investors to not invest in every and any AI company with the expectation that they will become a billionaire.
However, with the growing usage of AI by teenagers, college students etc. (see page 14 for “Men for and with screens”), AI companies may keep growing as there is still much room for further gains. The possibilities are endless for AI because these companies are putting plenty of time and money into this growing sector.
Nevertheless, investors are exceedingly nervous that this AI bubble is a replication of the dot-com (.com) bubble. The dot-com bubble was a period of immense growth and investment in internet tech-based companies from 1995 before popping and declining in 2002.
Jensen Huang, CEO of NVIDIA, addressed these concerns, saying, “What’s going on in the world versus what happened in 2000 is just dramatically different. Back then, as you recall, there were Pets.com, Hospitals.com, and all of the internet companies combined were what, $30 or $40 billion in size? […] If you look at the AI hyperscalers, that’s about $2.5 trillion of business that’s already operating today.”
If this AI bubble follows the familiar path set by the dot-com bubble, the collapse would be around 2029, assuming the AI bubble began expanding in 2022. The bubble will pop, but when and how is a question that all investors need to be careful with. It is unlikely that the AI bubble will burst this year, but it is possible that it could fragment in the next couple of years. Regardless of this, Artificial Intelligence will be life-changing for millions and potentially billions in the coming decades. However, that does not mean people should carelessly invest their money hoping they will strike gold.
