Are we in an AI bubble? Here’s what analysts and experts are saying
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This is the biggest question in technology and there are a wide variety of opinions on all sides.
Given that AI-focused spending is leading to record deals and valuations, it seems like everyone is weighing in on the AI boom and potential bust.
Economic bubbles occur with a rapid rise in market values and asset prices in a particular region, often fueled by speculation, followed by a crash in which money is rapidly withdrawn.
According to CB Insights, more than 1,300 AI startups are valued at over $100 million, with 498 being AI “unicorns” or companies valued at $1 billion or more.
Megacaps like Amazon, Meta, and Microsoft are spending billions of dollars on data center builds, and blockbuster deals from OpenAI are being announced left and right. Nvidia et al.
The deal- and spending-exuberance parallels the dotcom bubble of the late 1990s and even the 2008 financial crisis.
Others think a technological revolution is happening with strong demand and money “well spent.”
Here’s what CEOs and experts have been saying lately:
We continue to see opportunity because ultimately, AI bubble or no AI bubble, this comes down to real dollars spent on real capex, with a very long funding path ahead of us.
Anneka Treon
Head of ING Global Private Banking, Asset Management and Investment
Even though companies spend a staggering half of their operating cash flow on AI initiatives, there’s more than enough capital to fund it, Treon said.
“This resource, this funding runway, is not something I think we should be worried about,” Treon said on CNBC’s “Power Lunch” last week.
Total global AI spending is expected to reach $375 billion this year and is predicted to reach $500 billion by 2026, according to a study. report by UBS. Treon said it won’t be clear until at least a year later whether these massive expenditures will actually generate the expected return on capital.
However, Treon thinks the current market environment is optimistic.
“You’re seeing easier monetary policy, you’re seeing easier fiscal policy, you’re seeing strong earnings growth, and you’re seeing booms in capital spending,” he said.
We note that the share of the economy devoted to AI investment is almost a third greater than the share of the economy devoted to internet-related investments during the dotcom bubble. Therefore, we think there are sufficient analogies to make this call.
Jared Bernstein
former Biden CEA chief
Bernstein told CNBC’s “Squawk Box” last week that rising asset prices and extreme valuations suggest an AI bubble is the “likely outcome.”
Bubbles, he said, are defined by a large gap between investment levels and actual “credible expectations” of future profits.
Bernstein pointed to OpenAI, which already has nearly $1 trillion in AI deals, including a $500 billion data center construction project, despite being set to generate only $13 billion in revenue.
“You have to take your future earnings into account,” Bernstein said. “But to us and many others, the gap between credible, plausible, expected future returns and investments at this level looks absolutely stark.”
Despite the Magnificent Seven’s spending spree on artificial intelligence, Bernstein said their profits mostly come from other areas such as advertising and cloud services.
“Actually, if you look at artificial intelligence investments, you will see that they have a small share. [the profits]”So this actually contributes to the bubble hypothesis,” Bernstein said.
I think some of the investments we’ve seen so far are not in artificial intelligence, but rather in the cloud and the power of the cloud. So I don’t believe this is a bubble, but I do believe this is capital well spent in most cases.
Fink told CNBC’s “Squawk on the Street” last week that a “skyrocketing amount of capital” is certainly being poured into AI, which he believes is not a sign of a bubble but a necessary investment for the U.S. to remain a global leader in AI technology.
“Investing in AI doesn’t just mean investing in GPUs and chips; it means investing in HVAC and IT, investing in power grids and power supplies,” Fink said.
BlackRock CEO said these big risks will ultimately lead to some failures, but big hyperscalers Meta, MicrosoftAnd Alphabet they are “really well positioned” to be winners.
“This is capitalism,” Fink said. “We’re going to have some big winners and some big losers… but if you have a diversified portfolio you’ll be fine.”
Are we in an AI bubble? Certainly! … Of course we are. I mean, we’re excited, we’re accelerating, we’re putting tremendous pressure on the system.
Pat Gelsinger
Former CEO of Intel
Gelsinger said that while the AI-focused market is already in a bubble, it will take “a few years” to see it end.
“As we think about it today, we are displacing the entire internet and service provider industries,” Gelsinger said on “Squawk Box” last week. “We have a long way to go.”
The former Intel CEO believes that major disruptive technologies will develop by the end of this decade, when companies can begin to benefit financially from them, buying plenty of time before the bubble bursts.
“It will change with this,” Gelsinger said. “These are the radical advances in AI efficiency that have occurred this year.”
In my opinion, the main ingredient of balloons is psychological excess; There is no such thing as the price being too high. And I don’t perceive that level of madness right now, so I haven’t put a bubble label on this.
Howard Marks
co-founder of Oaktree Capital Management
In an interview with CNBC’s Sara Eisen last week, Marks said that while there is unquestionably excitement for AI, he doesn’t see it reaching a “critical mass” of craze that indicates a definitive bubble.
“My response so far has been that valuations are not crazy,” Marks said. “It’s high but not crazy. And if things are high or low but not crazy, you can’t make an observation that has a good chance of being true.”
The veteran investor likened the current AI enthusiasm to the internet boom of the late 1990s; This rightfully promised to change the world, even though it ultimately left many companies worthless.
Marks warned of common behavior seen in “bubble psychology”, where investors will back any company even if it has the slightest chance of big returns. While he sees hints of this extreme risk-taking pattern in today’s AI boom, Marks said true bubble behavior has not yet been achieved.
We’re certainly seeing a lot of evidence of bubble-like behavior in the AI space. We’re seeing some sort of cyclical revenue engagement, we’re seeing a lot of aggressive price behavior.
Ben Inker
GMO asset allocation co-chairman
Inker said on CNBC’s “Money Movers” last week that the firm’s investments are shifting from being financed by free cash flow to relying on Nvidia’s debt and large stakes.
“It’s one thing for Microsoft or Meta to want to put a lot of money into data centers where they have the cash flow,” Inker said. “OpenAI doesn’t do it, xAI doesn’t do it, even Oracle is doing a lot of debt to be able to do it.”
Last year, OpenAI expected an operating loss of about $5 billion on revenue of $3.7 billion, and it’s still losing money. Inker said this makes Nvidia’s $100 billion investment in OpenAI (to build data centers powered by Nvidia chips) concerning.
“This whole ecosystem has kind of run out of capital from the cash flow of the hyperscalers that have been funding things so far, and now it has to be financed with debt and these very weird deals between Nvidia and AMD and some of the money-losing companies that have huge capital needs,” Inker said.
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