Will the AI ​​bubble burst?

After weeks of turmoil on the stock market, speculation is rife that the AI ​​”bubble” may be about to burst.

The stock prices of many companies involved in AI have risen dramatically over the past year or so. The most famous example is Nvidia, whose stock price has more than tripled in the past year. Other companies that have invested heavily in AI, such as Google and Microsoft, have also seen their stock prices rise significantly.

A large increase in share price, especially if it does not seem likely to translate into real value creation, is sometimes viewed by analysts as an indication that a price correction is due.

It feels like we’ve seen all this before. Around 2000, the “dot-com bubble” burst shortly after the hype and excitement around the newly emerged Internet reached its peak. Many companies went bankrupt, the economy experienced a major downturn, and many jobs were lost.

So, is this a bubble? AI has the potential to add around $15 trillion to the global economy, but recent poor earnings reports from companies like Google and Tesla have led to falling stock prices. At the same time, there are reports of growing public distrust of AI, making it harder for companies to profit from it.

Does this mean that the AI ​​revolution, touted to hold the solution to a range of problems from curing cancer to protecting the environment, is about to collapse right before our ears?

Personally, I don’t think so, but even if it did happen, it might not be a bad thing for AI adoption in the long run.

Will 2000 repeat itself again?

Indeed, there are striking similarities between the situation we are witnessing today and the economic and market conditions that led to the collapse of the great dot-com bubble in 2000.

In both periods, stock prices and company valuations increased significantly, but this appears to be driven by hopes and expectations for the future rather than tangible current results.

The result was major stock indexes like the S&P 500 that were heavily dominated by tech stocks, reflecting the weighting of internet companies at the turn of the century.

Just like with the Internet back then, all big companies are looking to boost their valuations by leveraging their AI efforts, which are expected to bring huge profits and growth in the future.

But there are some very important differences: First, today’s AI leaders — companies like Microsoft, Nvidia, Alphabet, and Meta — are already hugely profitable: They have proven business models and solid, reliable revenue streams that are unlikely to dry up even in the unlikely scenario that all AI plans fail.

This was not the case for many of the hundreds of companies that went bankrupt when the dot-com bubble burst, most of which have probably been completely forgotten by now.

Putting all their eggs in one basket, so to speak, meant they were not positioned to survive a temporary lull in market enthusiasm for the Internet gold rush.

Things are very different now: Even if it turns out we’re not yet ready to jump into a fully automated, AI-driven society, Google’s and Meta’s advertising services, Amazon’s shopping business, and Tesla’s cars will keep these companies afloat until we are.

Plus, their huge user base and vast amounts of proprietary data act as a defense against upstarts trying to sneak in and launch competing AI services.

So, is it safe for me to invest all my money in AI stocks?

Now, first of all, of course, nothing I say here should be taken as investment advice, as I am in no way a financial advisor.

But here’s my take: The sky-high valuations we’ve seen over the past year or two are clearly a sign of a bubble, and a correction is likely coming and may even be underway now.

But despite this, I believe the medium- and long-term outlook for AI is very bright, and it certainly has the potential to be as transformative as, or even more transformative than, the emergence of the internet in the late 20s.^Number Century ultimately proved to be the case.

I also believe one of the reasons many companies have yet to realize real value from AI is because many leaders are not yet prepared for the AI ​​revolution. You can read more of my thoughts on this here.

When the dot-com bubble burst, the companies that did not survive were those that failed to think strategically about how the Internet would impact their business and the opportunities it would create.

Meanwhile, companies that approached the internet not just as an opportunity to bring their existing business models online but as a way to fundamentally rethink them from the ground up – Amazon, Google and Netflix are just three of the most prominent examples – have not only recovered but reached even greater heights.

That’s why it’s important, even for someone like me who is a firm believer in the potential of AI, to be aware of the fact that we may be living in something of a bubble, and that there may be some disruptions ahead.

Market corrections remind us that the true transformative potential of revolutionary advancements like AI (or the Internet) lies not in speculative excitement or hype, but in the real-world applications and the real value they generate.

By refocusing on real innovation and its tangible benefits, we can better recognize its value and make more informed decisions about investing in our AI future.