AI Bubble

AI Bubble

 

Are we in an AI bubble? Will we see an AI bubble pop soon? What does an AI bubble look like? You are probably hearing these types of questions or asking them yourself. It is difficult to see bubbles and differentiate them from normal-growth and high-growth opportunities. Once they pop, it is clear when you look back and see with 20/20 vision exactly what happened.

     I don’t have all the answers either, but this is what I see. I see AI fundamentally shifting how we live and work even now while we are in the early stages of AI. This means there will likely be more and more demand for AI each year going forward. The tech companies have led the charge to scale and get ahead of this demand and have done a really good job at this so far.

     The challenge they will have will be to continue to scale without hitting a bottleneck. That bottleneck could be a supply chain issue, like a chip shortage. It could be an energy issue where demand drives the cost of energy up. It could be a demand tapering where the consumers and businesses slow their buying rate for AI tech. Any of these things could occur along with many other possible bottlenecks. If any of these do occur, the questions will be: how long and how severe of a shift will it cause? If it is a minor hiccup, then we may see some price drops, but not enough to call it a bubble popping.

     The real risk that I see is years away. As tech companies race into the AI future, they are spending money in ways tech companies usually don’t. Traditional tech spending has been very profitable with low overhead. Tech has benefited the past several decades with low-cost, highly scalable growth. The AI boom is requiring and will continue to require capital expenditures in building data centers and replacing chips and supplies that get old and need to be replaced every 3-5 years just like our phones and computers. In my opinion, this will be the drag on AI. It will take years to come to fruition, and the growth may be amazing between now and then. But eventually, the high-valuation tech giants that can pivot on a dime today will likely become more like brick and mortar companies of the past where they are not as “growthy” and far more stable and predictable.

     This may not be a bad or painful process for them or their stock price. But if they continue to maintain high stock prices as they scale, then there will be a significant pullback, and the valuation bubble will absolutely pop in this scenario. At this point, I don’t see any AI bubble in the immediate future, but if it does pop, there will be a lot of investors trying to sell their AI stocks and no one interested in buying.