The fear of the crash: Is the AI ​​bubble about to burst?

After the Nvidia share price slump, is the big AI crash on the stock markets imminent? Experts see parallels to the dotcom bubble, saying that artificial intelligence is massively overvalued.

How much is the future worth? Around a billion dollars – that's how much the entire tech industry will invest in artificial intelligence (AI) in the next few years. That's a lot of money, even for Silicon Valley, where some companies have a market value beyond the billion dollar mark.

Is AI as important to humanity as fire?

Anyone who wants to invest so much money in something has to be really convinced of it – and that's what the tech CEOs seem to be. Back in 2018, Google CEO Sundar Pichai was certain: “AI is one of the most important things humanity is working on. It's more profound than, I don't know, electricity or fire.”

And while there are certainly more ardent AI supporters among the top management of companies like Google, Meta, Amazon and Microsoft, which are well-equipped with financial resources, all that money will have to be recouped at some point. The alternative would be an economic collapse the likes of which the world has not seen in years – or has it already begun?

If Nvidia coughs, the stock market gets a grip

The almost ten percent drop in the share price of AI profiteer Nvidia at the beginning of the week is certainly worth noting. After all, the chip company's market capitalization was reduced by 279 billion dollars – no US company has ever lost so much market value in just one day.

This fueled fears on the stock markets of a new wave of selling or even a bursting of the AI ​​bubble, as AI hopes had been one of the biggest drivers of share prices in recent months. The lack of market breadth, as well as the concentration of the stock market on a few players, is now having a negative impact. It is not for nothing that traders say: If Nvidia coughs, the stock market gets a grip. Nvidia shares have already lost around 25 percent since their record high in June, which means that according to a common stock market rule, they are in a bear market.

How FOMO is driving AI investments

But there is still no indication that the big players in the tech industry have had doubts about their AI investments. On the contrary: they all seem to be driven by the fear of missing out on the next big thing. This fear, known as “Fear of Missing Out” (FOMO for short), was recently echoed in presentations of Google's quarterly figures. Pichai emphasized: “The risk of investing too little in AI infrastructure is dramatically greater than investing too much.”

There is also hope that the gigantic investments will one day pay off. The management consultancy Next Move Strategy Consulting estimates the global AI market volume to be $1,847 billion by the end of 2030. According to a forecast by the management consultancy PwC, AI could even increase global GDP by almost $16 billion by 2030 – mainly thanks to improved labor productivity.

This is how expensive ChatGPT is for the OpenAI group

In fact, the economic added value of AI companies is still extremely low. And it could remain so for quite some time. Building and operating generative AI is extremely costly. After all, AI chips cost tens of thousands of dollars per semiconductor. Billions of dollars are needed to have the fastest supercomputer available for training with new AI systems.

Google's parent company Alphabet alone invested twelve billion dollars in AI last quarter. According to OpenAI CEO Sam Altman, his company is the most capital-intensive start-up in history. In 2023, a study estimated that running ChatGPT would cost the company $700,000 per day. And the more people use the chatbot, the higher these costs will rise.

OpenAI announced just last week that the number of weekly ChatGPT users has doubled since November to over 200 million users. However, the high investments in AI have so far been offset by only meager sales. This year, OpenAI could make five billion dollars – ten times as much as in 2022.

Big Tech in “Bubble Land”?

It is numbers like these that have brought AI skeptics to the fore. In recent weeks, numerous analysts from major banks such as Goldman Sachs and Barclays, as well as tech venture capital firms such as Sequoia Capital, have expressed doubts that the gigantic AI investments will pay off in the foreseeable future.

Sequoia Capital calculates within minutes that the big AI bill, i.e. all the money that tech companies have invested in AI so far, now amounts to 600 billion dollars. These 600 billion dollars must first be earned so that they can survive the AI ​​venture with as little cost as possible.

According to the Financial Times, Paul Singer's hedge fund Elliott recently told its clients in a letter that artificial intelligence is massive (“overhyped”). Nvidia and the entire Big Tech sector live in “bubble land.”

Dotcom bubble as a role model?

However, it is difficult or even impossible to predict when a bubble will burst. Prices – in this case for shares in AI companies – continue to rise as long as there is an “even bigger fool” in the market who will pay even more for it. This is what the “Greater Fool Hypothesis” says.

But history teaches us how this stock market bubble will end – just like all its predecessors, be it the railroad or the dot-com bubble: with a rapid collapse of individual prices that has the potential to drag not only speculators but entire economies into the abyss. Some of the companies that are now being hyped may well survive and emerge stronger. But they may first have to walk through a valley of tears.

When the music is heard

For example, Amazon's share price fell 95 percent from its record high when the dotcom bubble burst. It took years for it to recover. This should be a warning to anyone who is still blindly betting on the AI ​​trend and ignoring the risks.

“As long as the music is playing, you have to get up and dance. We're still dancing,” said the then Citigroup CEO Chuck Prince, dismissing investors' fears about the real estate crisis. Less than a month later, the first bank, the German IKB, collapsed – and the financial crisis began.