AI Industry Faces Growing Bubble Concerns as Valuations Outpace Revenue Reality

AI bubble trouble talk is overblown

Stock market veterans often say that it's impossible to tell when you're living inside a bubble. Truly irrational behaviour only becomes clear in hindsight, when sanity has returned. So why, suddenly, has talk of an AI bubble become so prevalent? Expectations are certainly running well ahead of current reality. That is the nature of any new technology, as investors try to predict the scale of a market that is still taking shape. But even if valuations are stretched, it doesn't mean AI investment is facing the kind of general implosion that happens when bubbles collapse in on themselves, rather than with the sort of severe corrections that often follow tech stock booms. The bubble theorists are grappling with two interrelated issues. One is an overbuilding of data centres that could leave a massive overhang of stranded assets. The other is the risk that some stock market valuations have completely lost touch with reality. Start with the boom in data centre construction. Most of this still lies in the future. Bubble talk really took off around the time OpenAI started disclosing the long-term deals it has put in place to support $1.4tn of planned investments. Much of this is notional, though: So far, OpenAI and Nvidia have firmly committed to building only a tenth of the potential capacity covered by their giant, $100bn deal. The rest will only follow if demand lives up to the companies' hopes, and if other investors can be found to foot the bill. For the foreseeable future, the AI market is facing a shortage of capacity -- hardly the kind of conditions that spell imminent disaster. It's certainly true that, on current projections of new construction, supply is set to catch up well before the AI companies are able to monetise their extra capacity. In a post on X last week, OpenAI chief executive Sam Altman pinned his company's hopes for hitting its revenue targets on initiatives it hasn't even launched yet, from a new push to sell AI to business customers, to potentially entering markets like cloud computing and robotics. Even if this points to a yawning gulf between the costs of building new data centres and the AI revenue they are expected to generate, it's too early to tell how big the gap will be, or how long the revenue lag will last. Handicapping the rate of growth is different from concluding that the technology, in its current form, will never be able to support the investments that are planned. The real bubble risk is that inherent weaknesses in large language models -- like their tendency to hallucinate -- will limit their usefulness, or that the costs of running them will make them chronically uneconomic for many purposes. It won't be clear for some time whether this will become a serious barrier to growth. Investors, of course, may get spooked even before that moment comes. Cutting off capital would become a self-fulfilling prophecy, hitting companies tied to the build-out. Yet that kind of dislocation, while hammering a company like OpenAI, would leave companies with stronger balance sheets, like Google and Microsoft, well placed to take more share in an AI market they have pinned their companies' futures on. If expectations are reset or delayed, then tech stock valuations would certainly take a bashing -- though, again, it need not lead to the kind of severe, lasting collapse that is characteristic of a bubble bursting. After the dotcom bust, it took the Nasdaq 16 years to make a lasting break back above its previous peak. Some tech stocks caught up in the AI boom could face that kind of prolonged winter. Palantir, valued at around 250 times this year's earnings, is benefiting from AI demand but could take many years to grow into its current valuation. But the price/earnings multiples of the biggest tech companies, though higher than their long-term averages, are not above levels they have seen at other points during the long tech boom. The demand for AI chips, meanwhile, continues to soar, prompting AMD this week to predict an annual market of $1tr by 2030. Nvidia is widely expected to underline the boom when it reports its latest earnings next week. Chip stocks are usually deeply cyclical, and a pullback in data centre spending would cause a serious dent, but that moment is not yet in sight. All of this suggests that companies riding the AI boom could be vulnerable to an across-the-board retreat that in some cases would be severe. But that doesn't necessarily mean that AI has a case of bubble trouble.

'Vibe revenue': AI companies admit they're worried about a bubble

LISBON, Portugal -- Top tech executives told CNBC they're concerned about a bubble forming in the artificial intelligence sector, underscoring growing unease within the industry over soaring valuation. In recent weeks, markets have been reckoning with the notion that too much capital is pouring into the AI boom, clouding the outlook on revenue and actual profit and putting high valuations into question. Up to now, warnings around overstretched valuations have mostly come from investors and leaders in the world of finance. Goldman Sachs' David Solomon and Morgan Stanley's Ted Pick have warned of potential corrections as valuations of some major tech firms reached historic highs. The concerns have been crystallized by famed 'Big Short' investor Michael Burry, who this week accused major AI infrastructure and cloud providers, or 'hyperscalers' of understating depreciation expenses on chips. Burry warned that profits at the likes of Oracle and Meta may be vastly overstated. He recently disclosed put options that bet against Nvidia and Palantir. However, CEOs of companies who are themselves developing AI, expressed their concerns this week during interviews with CNBC at the Web Summit tech conference in Lisbon. "I think the evaluations are pretty exaggerated here and there, and I think there is signs of a bubble on the horizon," Jarek Kutylowski, CEO of German AI firm DeepL, told CNBC on Tuesday.

Dark Clouds Suddenly Gathering Over AI Industry

A major tech selloff is shaking up Wall Street as the enormous gulf between AI company valuations and their lagging revenues continues to grow. As the Wall Street Journal reports, the stock market has been showing marked signs of "fragility," with Nvidia slipping seven percent last week. Despite signs of an end to the ongoing federal shutdown buoying up some excitement, the AI chipmaker continued its plunge this week, sliding another three percent on Tuesday. Meta shares have also fallen almost 17 percent since its quarterly earnings report late last month, despite the company beating investors' expectations. AI software giant Palantir has suffered a similar fate, dropping eight percent since posting better-than-expected numbers early last week. In short, there's clearly a dark cloud gathering over the AI industry, where lofty claims of immense capabilities always seem to remain in the future, and investors are increasingly balking at astronomical spending on AI infrastructure. There are growing concerns that the untold billions of dollars being spent on data center buildouts may never lead to the promised returns. Tech leaders are now openly discussing an AI bubble that could plunge the United States deep into a recession if it were to pop, economists have warned. Adding to the uncertainty is Japanese company SoftBank, which announced this week that it had sold off its Nvidia stake for $5.8 billion -- money it promptly used to bankroll different AI bets, including heavy investments in OpenAI. SoftBank's shares slid as much as ten percent on Tuesday, following concerns that SoftBank had to sell in order to meet exploding funding needs. In an apparent attempt to calm spooked investors, SoftBank Vision Fund CFO Navneet Govil promised that the AI hype wouldn't lead to a disaster. "What's different between the dotcom boom and today is that AI companies are generating meaningful revenues," he told reporters, as quoted by Reuters. "There's a lot of talk about [capital expenditures] spend, but it's actually driven by demand." Looming in the shadows is Michael Burry, who famously shorted the US housing market before its collapse in 2008. Last week, Burry bet over $1 billion that the share prices of AI chipmaker Nvidia and software company Palantir will fall, stoking further fears. Companies are already suffering billions of dollars in losses as revenues continue to lag behind. While the privately-run OpenAI is playing its cards close to its chest, the Sam Altman-led firm is planning to spend $1.4 trillion over the next eight years. That's despite only making around $20 billion in annual revenue today as it continues to hunt for a meaningful business model. But whether the latest stock market selloff is symptomatic of an impending implosion is anything but certain. Investors continue to pour billions into the AI industry, with firms announcing billion-dollar deals and plans for enormous data center projects. That's despite a notable lack of a "clear financial model for profitable AI," as the WSJ puts it -- an enormous bet that has once bullish investors growing increasingly wary.