Commentary: AI bubble trouble talk is overblown

THE REAL BUBBLE RISK

Handicapping the rate of growth is different from concluding that the technology, in its current form, will never be able to support the investments that are planned.

The real bubble risk is that inherent weaknesses in large language models – like their tendency to hallucinate – will limit their usefulness, or that the costs of running them will make them chronically uneconomic for many purposes. It won’t be clear for some time whether this will become a serious barrier to growth. 

Investors, of course, may get spooked even before that moment comes. Cutting off capital would become a self-fulfilling prophecy, hitting companies tied to the build-out. Yet that kind of dislocation, while hammering a company like OpenAI, would leave companies with stronger balance sheets, like Google and Microsoft, well placed to take more share in an AI market they have pinned their companies’ futures on.

If expectations are reset or delayed, then tech stock valuations would certainly take a bashing – though, again, it need not lead to the kind of severe, lasting collapse that is characteristic of a bubble bursting.

After the dotcom bust, it took the NASDAQ 16 years to make a lasting break back above its previous peak. Some tech stocks caught up in the AI boom could face that kind of prolonged winter.

Palantir, valued at around 250 times this year’s earnings, is benefiting from AI demand but could take many years to grow into its current valuation. But the price/earnings multiples of the biggest tech companies, though higher than their long-term averages, are not above levels they have seen at other points during the long tech boom.

The demand for AI chips, meanwhile, continues to soar, prompting AMD this week to predict an annual market of US$1 trillion by 2030. Nvidia is widely expected to underline the boom when it reports its latest earnings next week. Chip stocks are usually deeply cyclical, and a pullback in data centre spending would cause a serious dent, but that moment is not yet in sight.

All of this suggests that companies riding the AI boom could be vulnerable to an across-the-board retreat that in some cases would be severe. But that doesn’t necessarily mean that AI has a case of bubble trouble.