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The world of artificial intelligence (AI) is witnessing intense speculative fervour, and the momentum is quite ominous. It brings to mind several bubbles, be it real estate or dotcom, that burst to singe investors and leave companies bankrupt.
This week, for instance, a single company OpenAI has signed about US$1tn in deals with Nvidia, Oracle, CoreWeave and AMD this year to get computing power to run its AI models. Earlier, between 2020-25, global investments in AI totalled US$1.3 trillion with US-based firms leading and China ranking second.
The conviction is that from automating everyday tasks to generating human-like content, AI is a transformative force across industries—from healthcare and education to entertainment and finance- and across countries and regions. In his recent column in the Financial Times, Ruchir Sharma, chair of Rockefeller International, points out that the “AI optimism has become a self-fulfilling prophecy.” Hundreds of billions of dollars invested in AI account for an astonishing 40 per cent share of US GDP growth this year!
The rising optimism about the potential for AI technology has led to a rise in valuations of the front runners in the sector. OpenAI is now worth US$500billion which is a little over three times that in October last year. Another company Anthropic almost trebled its valuation recently, in just a month. Analysts are worried about the rise in valuations when the company (OpenAI) is still clocking a loss at the operating level. Indeed, AI companies have accounted for 80 per cent of the gains in US stocks so far in 2025.
Clearly, this is a bubble that is growing rapidly. The concern is that any change in dynamics of the user industry or adverse turn in the circular deals between large entities such as OpenAI, Nvidia, Oracle could trigger fear among investors, enough to burst the bubble. In today’s edition, the Chart of the Day highlights that companies are now delaying IT spends given that they are yet to reap the full returns on capital invested in technology soon after Covid. In fact, AI-driven productivity gains could hurt IT services revenues by 20 per cent over FY2025-30, in what is often referred to as revenue deflation. This could derail the revenue growth forecasts of AI companies too.
The bigger question is whether all is well in large, developed economies such as the US to support such hefty investments over the long term. A report by Kotak Institutional Equities makes a valid observation. On the one hand, the price of gold has surged to record levels as investors and central banks world over rush to the safe haven asset- a clear indication that inflation and trade tensions will impact economies adversely. On the other hand, the sharp increase in prices of AI stocks and crypto assets would suggest that the market is euphoric about the prospects of growth in general and of risky assets, in particular. The single common reason for such divergent logic holding ground is perhaps liquidity, rather than healthy fundamentals.
International ratings agencies and research houses have sounded alarm bells on the unknown path to profitability of the AI world. None less than the International Monetary Fund and the Bank of England recently specifically referred to the growing risk to financial markets from heightened AI valuations.
Savvy investors have been here before. The dotcom bubble that burst not too long ago sported a similar scenario- exuberant valuations questioning traditional firms, large and copious venture capital funds, investment banks tailoring initial public offerings to tap retail funds and media hype with the rising fear of missing out. Investors could do well to step back and get realistic as the AI bubble grows.
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Vatsala Kamat
Moneycontrol Pro
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