Analysts claim that artificial intelligence (AI) investment has entered a bubble—and that investors should tread cautiously as they make their investment decisions.
- In a Monday research note, Morgan Stanley researchers Edward Stanley and Matias Ovrum warned of the “bubble-like euphoria” overtaking AI investing.
- Stanley warns investors to be careful—not to rush into investments and to be patient—and warns that the space is experiencing a market bubble created by hype in AI technology.
- They note that the long-term outlook for AI is strong but that the short-term outlook does not look promising.
- “History has shown that for multiyear themes—which we believe this is—there is usually little need for investors to rush in,” they said in a statement to Fortune.
- Other analysts agreed and disagreed, noting that there are reasons to believe the bubble could pop or be sustainable.
Why It’s Important
The launch of ChatGPT on November 30, 2022, has turned the world on its head—sparking an “AI arms race” and leading thousands of corporations, tech companies, and startups to race and push out the first and best AI-powered applications onto the market. This hype and demand has spurred enormous investment into research and development, rallying the market around companies that push the technology.
Nvidia, in particular, has been at the forefront of the AI arms race due to its massive 200% year-to-date rally as demand for computer chips spiked as tech companies built up their computing capacity to build newer and larger AI models. Companies that have invested heavily in AI have also seen massive valuation spikes—including Meta Platforms (154%), Amazon (65%), and Microsoft (35%).
“There’s a huge boom in AI—some people are scrambling to get exposure at any cost, while others are sounding the alarm that this will end in tears. Investors can benefit from innovation-led growth but must be wary of overpaying for it,” Sparkline Capital CIO Kai Wu tells The Wall Street Journal. “Valuations matter. Investing in stocks exposed to rapidly growing technologies only works if the growth is not already priced-in. Unfortunately, in periods of euphoria, the market tends not only to price in potential growth but to greatly over-extrapolate it.”
As we previously reported, large Wall Street figures like Cathie Wood and Andreessen Horowitz have praised AI as the future with big pronouncements about how the technology is the future and can save the world. Even while Wall Street has rallied, concerns have been raised that ChatGPT is already losing popularity and that vital research and development could forestall the economic benefits of the technology for years.
It is also possible that a Dotcom-style market crash is not likely for AI investment. As The Wall Street Journal notes, the stocks that have benefitted most from the market rally are large companies that were already strong prior to the hype. It remains to be seen whether the hype will sustain into the immediate future.
“It’s not like 1999 when investors were racing to hot IPOs for companies that had no chance of making money. Today’s winners are disciplined, enormous companies that have moats in place and data sets to exploit,” says Weiss Multi-Strategy Advisers CIO Mike Edwards.