The AI Bubble is going to explode

I am sure none of us can forget 2022, when ChatGPT kicked off the much anticipated rush in the world of AI, taking us closer to the world where we will fight terminators!

Just Kidding!

What it actually sparked was a series of events where the tech giants jumped into the race, pouring billions into chips, data centers and all things AI. The hype reached a fever pitch and in June this year, Nvidia, the chipmaker powering much of this AI revolution, soared past the $3 trillion market cap mark. Its shares skyrocketed nine times since 2022 briefly surpassing even the biggest tech giants like Microsoft & Apple.

And then, reality hit.

Just days after reaching its 2024 high, Nvidia lost a trillion dollar in valuation - almost 30 percent of its total worth. But Nvidia wasn’t alone in this. The entire gang of AI-heavy hitters - Microsoft, Apple, Tesla, Amazon, Meta, Alphabet, began to slide, losing trillions of dollars in market cap. Panic began to rise and whispers of the AI bubble bursting began to echo.

But, is the AI bubble really bursting out? And if it does, will it really have the same effect as the dot com burst? What is really going on? Well, this question caught my attention. And hence this issue!

To answer these questions, lets first put forward the reasons behind the dot-com bubble burst:

During the dot-com bubble, companies’ stocks soared on the hype even before they had a decent business model. The companies actually were running on unproven business models without making any profit or any money for that matter.

But the story is a tad bit different with the AI. The reason over here is more practical

Firstly, with US inflation slowing getting under control, investors are expecting the US Federal reserve to cut off interest rates. This will lead to smaller companies to borrow more money, allowing them to expand quickly and turn profitable. So investors are pulling out money from the giants and putting into smaller companies. And since these AI giants are “giants”, their stocks are taking a heavy hit.

Fact: It costs Open AI roughly $1 Million just to run ChatGPT everyday.

Now that gives a little perspective to the things that has been happening in the AI space. These AI companies are far from making a profit, almost a decade away. They will have to pour billions of dollars before they start delivering any real value in order for the customers to start paying for them in heavy chunks.

The investors probably realized the same and decided not to inflate these companies’ valuation just yet. No wonder they are pulling it back off. But that does not mean AI companies are going down and packing up like the companies during dot-com burst. Once they figure out the secret formula to make some money, the hype will be back. And that’s when the investors will jump back in too.

So what do we conclude from this? The AI bubble might burst, but it might take another decade or so, and it will definitely be different from the dot-com burst. We might even have to pick up machine guns and go to a war! Kidding again😉

So, did you like this issue?