The artificial intelligence (AI) industry has two people who are viewed as its leaders. One of these is Jensen Huang, the leader of dominant AI chip maker Nvidia Corp. (NASDAQ: NVDA). The other is Sam Altman, leader of AI company OpenAI. Altman recently said the industry is in a high-risk bubble.
24/7 Wall St. Key Points
OpenAI’s Sam Altman warns of an artificial intelligence (AI) bubble.
Big tech stocks like Microsoft Corp. (NASDAQ: MSFT) could collapse if Altman is correct.
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Altman told a group of journalists recently that AI has formed a dangerous bubble. “When bubbles happen, smart people get overexcited about a kernel of truth.” He added that AI has a remarkable future, but investors have gotten ahead of themselves.
Although Altman did not say so exactly, it appears he is referring to the dot-com bubble of 1999 to 2002, according to CNBC. The Nasdaq dropped 80% over the period, and some of the most prominent companies in the industry went under.
Dr. Torsten Sløk, the chief economist of Apollo Academy, wrote last month that “The difference between the IT bubble in the 1990s and the AI bubble today is that the top 10 companies in the S&P 500 today are more overvalued than they were in the 1990s.” The Apollo Academy is part of the global private equity leader Apollo Global Management.
What This Means for the Magnificent 7
If Altman and Sløk are right, the stocks of some of America’s largest companies could face a significant sell-off. Meta Platforms Inc. (NASDAQ: META), Microsoft Corp. (NASDAQ: MSFT), and Amazon.com Inc. (NASDAQ: AMZN) reported that they will invest tens of billions of dollars in AI server farms this year. This could be the most significant capital expenditure level in history.
The earnings of the large companies rely heavily on the success of their AI initiatives. That, in turn, translates into the value of their stocks.
What is the best way to look at a potential sell-off of the world’s most valuable companies based on market cap? One way is to look at their stock prices before the AI investment frenzy. In August 2023, Microsoft traded at $311. Today, it trades at $520, which is a gain of 67%. Meta traded at $274 in the same month. Today, it trades at $785. Meta’s stock is on its way to tripling over the same period.
Granted, Meta and Microsoft have posted good earnings in the past two years, but that cannot, in and of itself, explain the jump in their share prices.
If Altman is correct, the collapse of these stocks could be tremendous.
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