AI’s growing dominance in the world, whether it be reshaping industries’ workflows or influencing investor portfolios, is redefining how society and economies evolve. Of course, the hype and buzz around AI has been and is hard to ignore, but the question is, does this hype often overshadow the real challenges and limitations of AI?
According to a new Day Trading report, the excitement around the AI bubble points to signs of overvaluation reminiscent of the dot-com era. While some areas of AI are genuinely transformative, it’s not all boom or bust, but somewhere in the middle.
Dan Buckley, Chief Analyst at DayTrading.com, believes AI is a genuine technological boom, but it comes with pockets of overhype and speculation along the way. “We’re seeing record capital inflows, sky-high valuations, one-sided sentiment, and investing driven by FOMO before common sense. Yet we’re also seeing real-world use cases for AI and infrastructure investment at an industrial scale,” he said.
“The best framing is generally that AI is a real boom containing localised bubbles, not a mania in the board.”
The question remains – is AI a bubble? A bubble refers to when the price of an asset, like a stock or share, and sometimes, even a whole industry, grows in financial value much higher than its actual worth. This typically happens due to overexcitement and investors “following the crowd,” rather than basing decisions on true factors like demand and profits.
Stocks are overpriced
Currently, a number of AI company prices, including Microsoft and Nvidia, are substantially higher than their actual earnings or sales. Normally, high stock prices are justified by high profits, but the valuations of newer AI companies are, at present, over-inflated as they assume large future profits that may never materialise. This is demonstrated by a significant $560 billion investment into AI by companies over the last two years, but the estimated incremental revenue from such companies is only £35 billion – a considerable $525 billion gap.
AI hype ahead of results
Society as a whole assumes AI will revolutionise just about everything, but Day Trading’s report discovered many companies are not generating enough earnings to warrant such excitement. Investors are pricing vast returns on young technologies in early adoption phases in a “hope” that returns will match their investments. Moreover, many companies are “AI washing,” a tactic to exaggerate their AI capabilities to market themselves as more valuable than perhaps traditional assessment.
Financial risks
Some established global players like Nvidia and Amazon finance their growth through robust cash flows, but many newer AI startups are relying heavily on venture capital or debt funding, thus making them highly vulnerable if funding conditions change. Current enthusiasm around AI can attract emergency funding in some cases, but this reliance on high-risk financing highlights the fragility present in some segments of the AI market.
One-sided optimism
Investor sentiment towards AI is very positive, but also bullish. Sceptical perspectives are rarely acknowledged, which may leave the AI market vulnerable to sudden corrections if confidence is lost. Historically, bubbles tend to coincide with rising volatility, but the S&P 500 has remained relatively calm so far, suggesting surface-level stability. However, this may reflect confidence among investors convinced of AI’s promise.
Inexperienced investors fuelling AI hype?
According to Day Trading, a surge in inexperienced investors jumping on the AI hype bandwagon may be inflating valuations and heightening the risk of sudden corrections. Much like behaviour seen in the dot-com bubble, new buyers are following extant narratives, at present based on social media buzz and news headlines, instead of focusing on current earnings or real value.
Liquidity is keeping the AI infrastructure rolling
Although interest rates are higher compared to pre-pandemic levels, major tech firms have enough liquidity to continue investing heavily in AI without taking too much risk. The ratio of fresh equity or uncertain borrowing remains relatively low.
Speculative stockpiling
Some AI companies, like CoreWeave and Open AI, are aggressively hoarding resources, including AI chips and engineering talent, in anticipation of demand. This creates further financial risk if growth in sales were to slow. With no clear ROI or business models in place, capital is at the mercy of AI growth, or lack of it.
The bubble isn’t burst
Day Trading’s report highlights a range of concerns, similar to the dot-com bubble of the late 1990s and early 2000s. For instance, AI is already being used at scale, delivering productivity gains, particularly in sectors like finance, logistics, and media, something that was not evident in the dot-com era.
Although AI companies claim to be creating real value right now, compared to infrastructure investments being made, only a few are enjoying profitable margins, like Microsoft and Nvidia.
Substantial investments have been made for long term growth, not short term fast return. Therefore, the true returns may yet materialise as AI’s full potential unfolds over time. Eric Schmidt, former CEO of Google described, “AI as infrastructure for a new industrial era, not just a passing tech fad.”
Dan Buckley does not think AI is just hype, but excessive optimism can be dangerous. “AI is real and valuable,” Buckley said. “But it’s when market sentiment outpaces real business results that I begin to worry about the gap becoming dangerous for investors.”
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