Why AI Bubble Fears Are Back
Questions are finally starting to be asked about the AI trade, and the answers may not please some.
Longtime readers know the AI trade is something I’ve generally stayed away from. We’re seeing trillions of dollars invested in AI technology that hasn’t proven (yet) to have a sustainable business model.
My argument isn’t that it’s not valuable, but rather that we’re likely to over-invest, get a correction (the bubble pops), and then the opportunity for long-term gains comes in the wreckage.
In other words, the “Trough of Disillusionment” is my sweet spot, which I explained in this 2024 article.
I’m not predicting the bubble bursting yet. But I’m not going to get in front of that train, holding the bag when it does. And the past week has seen most of the AI infrastructure (bottleneck) stocks take it on the chin.
$NVIDIA(NVDA)$ $Micron Technology(MU)$ $Advanced Micro Devices(AMD)$ $Intel(INTC)$ $ARM Holdings(ARM)$ $Broadcom(AVGO)$ $Texas Instruments(TXN)$ $Marvell Technology(MRVL)$ $ASML Holding NV(ASML)$ $Lam Research(LRCX)$ $Analog Devices(ADI)$ $Monolithic Power(MPWR)$ $NXP Semiconductors NV(NXPI)$ $Applied Materials(AMAT)$ $KLA Corporation(KLAC)$ $SpaceX(SPCX)$ $CrowdStrike Holdings, Inc.(CRWD)$ $SanDisk Corp.(SNDK)$ $Western Digital(WDC)$ $Seagate Technology PLC(STX)$ $T-Mobile US(TMUS)$ $AppLovin Corporation(APP)$
Why? That’s what I’ll get to below.
The AI Trade’s Questions
What started all of this was reporting that OpenAI’s annualized revenue run rate was ~$50 billion, not the ~$70 billion that was previously reported.
There was a debate around whether that discrepancy was a misunderstanding or bad reporting. I’m not going to litigate that debate, and most of the conversation was silly, but that’s where this started.
And then there’s Anthropic’s stalled revenue, according to external data sources. Is this why Anthropic’s IPO keeps getting pushed back?
So, questions are starting to swirl about how quickly the big AI labs are growing.
And remember, the entire AI buildout is predicated on selling compute to OpenAI and Anthropic. $NVIDIA(NVDA)$ ( ▼ 1.29% ), $Oracle(ORCL)$ ( ▼ 2.84% ), $Alphabet(GOOG)$ ( ▲ 0.32% ), and $Amazon.com(AMZN)$ ( ▼ 1.11% ) are just a few of the companies that have contracts worth hundreds of billions of dollars to sell compute to the big AI labs, and if those labs aren’t growing as planned, their contracts aren’t worth a lot.
At the core of the problem is all of the growth and margins for companies like NVIDIA and $Micron Technology(MU)$ ( ▼ 3.88% ) is a business model that’s not profitable. OpenAI and Anthropic aren’t making money today.
Their suppliers are making money.
But they aren’t. And if they don’t make money, it’s not a good business.
If the foundation isn’t stable, the underlying AI trade isn’t either.
And more people are starting to question whether this is a bubble and if the bubble will burst soon.
Billionaire Ray Dalio warned that artificial intelligence is a “classic bubble” that is nearing a bursting point thanks to rising interest rates and the need to turn wealth into cash.
Speaking at the Forbes Global CEO Conference in Singapore on Wednesday, Dalio said that a huge amount of debt is being taken out to fund AI. As rates continue to climb, that is a point at which the bubble begins to pop.
“We’re in the part of the cycle that is before that but approaching that,” the Bridgewater founder said. “I think we’re close to that.”
Bloomberg
Dalio runs the world’s biggest hedge fund with ~$100 billion under management, so he knows a thing or two and has been around the block.
Carl Quintanilla reported that Barclays thinks the same.
And $Broadcom(AVGO)$ ( ▼ 1.88% ) CEO is just making fun of investors at this point.
Is it a bubble?
Probably.
When will it burst?
I don’t know.
But this stuck with me over the weekend. Dylan Patel says AI needs to have more than $3 trillion in revenue in the U.S. five years from now.
How much is that?
Why are AI bubble fears back? Because this level of revenue for AI companies seems insane.
Or maybe I’m the crazy one.
Markets are always moving - and sometimes, the best move is knowing what works for you.
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