Chipmaker Nvidia released yet another impressive financial results report this month.
Stocks fell anyway, as many investors fear the market is in the middle of an AI bubble about to burst.
But for AI’s biggest enthusiasts, the report was just another sign that the industry isn’t going to run out of steam anytime soon.
“Fears of an AI bubble are, in our opinion, greatly exaggerated,” wrote Wedbush analyst Dan Ives in a note last week.
Nvidia’s earnings report “is yet another point of validation for the AI Revolution and, in our opinion, we are at the beginning of the third inning of this AI game.”
but concerns have increased dramatically this year.
Massive spending on AI infrastructure, a series of circular deals among some big tech companies, and seemingly endless rhetoric about AI’s transformative potential – with little profit to show for it – have sparked fears that we are about to see another internet-like bubble burst.
About forty percent of the S&P 500 index is now comprised of 10 technology companies including Nvidia, Amazon, Meta, Oracle, Alphabet and Microsoft – all betting big on an AI revolution.
There’s a lot at stake: the bursting of the internet bubble contributed to the 2001 recession and led to Nasdaq index losing more than 75% of its value until the end of 2002.
But some analysts say investors should continue investing in AI.
They argue that there is a big difference between AI and the internet bubble era, when many early internet companies failed to find stable, profitable business models, with notable exceptions like Amazon and eBay.
AI companies, on the other hand, already have solid business models or viable paths to profitability, they argue.
“The lesson from the internet bubble era is that there was a bubble, and it burst. We don’t believe we’re in one right now in the AI sector,” Bob Michele, chief investment officer and head of JP Morgan’s global fixed income, currencies and commodities group, told CNBC last week.
And AI has much greater potential to generate profit, Ravi Mhatre, co-founder of Lightspeed Venture Partners, told CNN International. LSVP is a major investor in AI company Anthropic.
“The scale of revenue growth that is occurring in this cycle is exponentially greater than in previous cycles,” he said.
Rapid advances in AI models also mean that more applications for the technology are emerging regularly, Mhatre said.
Tech companies are already seeing an increase in demand for cloud services and productivity gains, especially in areas like programming and advertising. And there are many growing consumer-facing markets — ChatGPT, for example, recently added to help shoppers search for products. But whether this growth will outweigh the costs, especially for smaller companies, is still a big unknown.
Some investors believe the AI industry is at the start of a decade-long (or more) “supercycle” of innovation, investment and revenue. This could mean a global economy dominated and fundamentally transformed by AI, they say.
“I tend to believe that the AI supercycle is real, that it will have a pretty profound impact on the economy, but we have to take into account the full range of possible outcomes when we price these things,” Marta Norton, chief investment strategist at Empower, told Bloomberg Television last week.
Mhatre said that as a wave of investment is seeking a boost that may not prove successful. But the industry itself may not be in a bubble.
“I believe both statements are true. We are in a hype cycle,” Mhatre said. “On the other hand, this scale and speed with which value is being created is also radically different from previous cycles, in which the time needed for people to develop the technology and disseminate it was greater.”
