Introduction to the AI Bubble
Recently, OpenAI CEO Sam Altman warned that we’re in an AI bubble, with investors being overly excited about AI. This sentiment is echoed by University of Michigan business professor Eric Gordon, who believes that investors will suffer more from this AI boom than the dot-com crash. Furthermore, billionaire investor Ray Dalio has cautioned that investors are confusing AI being a great technology with it being a great investment. To answer these concerns, we will explore three key questions: Are we in an AI bubble? How bad can things really get? And what can we do to come out on top?
Assessing the AI Bubble
A recent MIT report revealed that 95% of companies launching AI pilot programs are seeing little to no results. Additionally, Citron Research published a short report stating that if Palantir had the same price-to-sales ratio as OpenAI, it would be trading at around $40 per share, which is more than 70% lower than its current share price. These warnings suggest that parts of the stock market may be in a bubble, but it’s essential to examine the data to determine which stocks are actually in a bubble and how big that bubble could be.
Comparing the AI Market to the Dot-Com Bubble
Comparing today’s market to the dot-com bubble of 2000 may be a mistake. Most dot-com companies had little to no revenue, zero profits, and burned money on overly optimistic business plans. In contrast, the top AI companies, such as Nvidia, Google, Microsoft, Amazon, Meta Platforms, and TSMC, have huge revenues and high operating margins. Moreover, it takes millions or billions of dollars worth of infrastructure to compete in the AI market, and consumers can already use AI as it’s baked into almost every app and service.
A More Accurate Comparison: The Rise of the Mobile Internet
A more suitable comparison for today’s AI market is the rise of the mobile internet. Companies and consumers were already online, and every website, software, and service transitioned to mobile applications. Similarly, AI companies can be categorized into three groups: foundational AI companies, AI infrastructure companies, or companies focused on AI services and applications. By examining the performance of these groups, we can better understand the AI market and identify potential bubbles.
Identifying the Real AI Bubble
While semiconductor companies like Nvidia and TSMC are reporting strong revenue growth and high operating margins, AI software and services companies like Palantir and CrowdStrike are trading at very high price-to-sales ratios and growing slower than the other two groups. This suggests that the real AI bubble is in the AI software and services sector, particularly in companies with high price-to-sales ratios and slow growth.
Investing in the AI Revolution
To invest in the AI revolution, it’s essential to focus on companies with strong fundamentals, such as semiconductor companies and hyperscalers like Google, Microsoft, and Amazon. These companies have huge revenues, high operating margins, and are investing heavily in AI infrastructure. Additionally, investors can consider venture capital products like Fundrise, which provide access to private pre-IPO companies in the AI and data infrastructure space.
Historic Data and Market Corrections
Historic data shows that bull markets last around 6 times longer than bear markets and return around 6 times more than bear markets lose. Additionally, stock market corrections are relatively rare, occurring once every 3 years, and usually recover in under 6 months. By understanding these trends, investors can make informed decisions and develop a plan to navigate the AI bubble.
Creating a Plan to Come Out on Top
To come out on top, investors should focus on dollar-cost averaging, keeping a little more cash on the side, and moving money into big, safe semiconductor companies and hyperscalers. It’s essential to avoid overcomplicating the situation and to prioritize investments in companies with strong fundamentals. By doing so, investors can navigate the AI bubble and potentially achieve long-term success.
Conclusion
In conclusion, while there may be a bubble in the AI software and services sector, the overall AI market is not in a bubble. By understanding the differences between the dot-com bubble and the rise of the mobile internet, investors can make informed decisions and focus on companies with strong fundamentals. By dollar-cost averaging, keeping cash on the side, and investing in semiconductor companies and hyperscalers, investors can navigate the AI bubble and potentially achieve long-term success. Remember, the best investment you can make is in yourself, and staying informed is key to making informed investment decisions.
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