AI boom starting to feel ‘bubblicious’ with fears it will burst

Investors are pouring hundreds of billions of dollars into artificial intelligence ventures, raising fears that stock prices won’t match profits and lead to a bursting bubble that sends shockwaves through the economy.

High valuations and allegations of circular financing, in which companies create artificial demand or revenue by investing in each other, have fueled comparisons to the dot-com boom and bust in the late 1990s.

Companies like chipmaker Nvidia have invested in OpenAI, the maker of ChatGPT, as part of a “strategic partnership” that calls on OpenAI to rely on Nvidia’s technology.

Companies like Oracle and Microsoft are part of the broader tangle of AI transactions, with money flowing back and forth among leading tech companies.

The “AI bubble” debate pits some economists, who fear intertwined spending and runaway investments will lead to a catastrophic loss of wealth, versus those who believe AI is a society-changing phenomenon that merits big-money investments in power and computing.

“It sure seems bubbilicious,” said James J. Angel, an associate professor of finance at Georgetown University’s McDonough School of Business.

Ultimately, he said, “time will tell” if the frenzy is problematic or just the byproduct of forging a society-changing industry.

“A lot of it just looks like good business by smart people, crafting good deals,” Mr. Angel said. “We all know this is going to be huge. But figuring out how much money OpenAI or the Magnificent Seven [big tech stocks] are gonna make on AI, that is what remains to be seen. This is how people’s expectations can get carried away.”

An industry bubble forms when investors get so excited about a sector that stock valuations exceed reasonable expectations. Often, there is fear of missing out, so stock prices rise even more.

But the bubble can burst if investors sour on overhyped companies and decide to sell their shares all at once.

Sam Altman, the CEO of OpenAI, suggested in August that there were valid viewpoints on either side of the debate.

“When bubbles happen, smart people get overexcited about a kernel of truth,” Mr. Altman told a group of reporters.

“Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes,” Mr. Altman said, as reported by Verge. “Is AI the most important thing to happen in a very long time? My opinion is also yes.”

Top companies have pushed back on the idea that they are inflating their numbers through mutual investments.

OpenAI was not required to buy Nvidia chips as part of Nvidia’s decision to invest in OpenAI. The ChatGPT maker is striking deals with other chipmakers, too.

“We do not require any of the companies we invest in to use Nvidia technology,” Nvidia said in a company statement.

Nvidia founder and CEO Jensen Huang characterized the investment in OpenAI as a no-brainer.

“I think that OpenAI is likely to be the next multi-trillion dollar, hyperscale company,” he told BG2, a podcast about tech and markets. “The opportunity to invest in that? The return on that money is going to be fantastic.”

Treasury Secretary Scott Bessent did not seem worried about the situation in a wide-ranging discussion with CNBC on Wednesday. He said the AI boom is only “in the third inning.”

“I think this is just taking off – in investment, in usage,” Mr. Bessent said.

Mr. Bessent said some of the “latent demand” in the industry is due to the shackles the Biden administration put on AI through regulation.

Still, some large institutions are wary of the rapid change from AI and uncertainty in the markets.

The Bank of England said “equity market valuations appear stretched, particularly for technology companies focused on Artificial Intelligence (AI).”

“This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic,” the bank’s Financial Policy Committee said in notes from its Oct. 2 meeting.

International Monetary Fund Chief Kristalina Georgieva warned of market corrections if investors lost their taste for AI, alongside factors like tariffs and global population fluctuations.

“Buckle up: uncertainty is the new normal and it is here to stay,” she said at recent meetings in Washington.

“Today’s valuations are heading toward levels we saw during the bullishness about the internet 25 years ago,” she said. “If a sharp correction were to occur, tighter financial conditions could drag down world growth, expose vulnerabilities, and make life especially tough for developing countries.”

Two top economic officials from the Biden administration, Jared Bernstein and Ryan Cummings, wrote a recent New York Times op-ed warning that the AI boom looked like the dot-com situation and the mortgage-backed securities fiasco that led to the Great Recession in 2008-2009.

“We believe it’s time to call the third bubble of our century: the A.I. bubble,” they wrote. “While no one can be certain, we believe this is more likely the case than not.”

When industry bubbles pop, sometimes the associated panic can harm the economy.

People think they cannot buy that new house or car because the economy looks wobbly, and banks that lent heavily to companies-in-turmoil see their lending capital go down, causing outward ripples.

Mr. Bernstein and Mr. Cumming said the good news is that AI lending is less intertwined into the broader economy than, say, the mortgage-related securities that caused havoc earlier this century.

Others don’t see an AI-driven crash on the immediate horizon.

“We could keep riding the AI train for a bit,” said Karan Giotra, a professor of operations, technology and innovation at Cornell Tech.

“This time is different than previous investment booms for several reasons,” he said. “The AI sector is on more solid ground than previous booms — as we have real revenues [and] profits, very strong consumer adoption and a continually improving and investment-hungry technology.”

Mr. Giotra said Meta and other deep-pocketed companies fear being left behind in the AI race. Their considerations “go beyond financial returns on AI investment, and they are not backing down,” he said.

“All of this,” he said, “would suggest we won’t have a big crash, like with the dot-com boom.”