The bubble is called time by the AI barons

Giants in the tech industry, including Sam Altman of OpenAI, are cautioning that the AI boom is approaching perilous heights

They might become the ones who bring about their own downfall.

Sam Altman, the founder of OpenAI, the company that makes ChatGPT, lamented that the valuations of AI companies were being driven way too high during a briefing to reporters last week. "Smart people get overexcited about a kernel of truth when bubbles happen," he stated. "In my view, we are at a point where investors are overly enthusiastic about artificial intelligence. It matters. Altman serves as the face of the AI boom. In the new sector, ChatGPT is now by far the most well-known brand. At a £300 billion valuation, it raised an additional £40 billion in funding earlier this year, more than doubling the size of the largest company in the UK and the largest amount ever raised by a private technology company.

Altman is not by himself. The chairman of China's tech behemoth Alibaba issued a warning earlier this year that supply would soon begin to surpass demand due to the rapid expansion of AI data centers. In the meantime, it was revealed last month that Meta, the company that owns Facebook, Instagram, and WhatsApp, had put a freeze on hiring in its AI division. This is hardly encouraging. We might anticipate that companies with fundraising campaigns and rising stock prices would be rooting for it from the sidelines. Rather, they are beginning to issue a warning that it is approaching hazardous levels.

Theyre right. In a summer note to investors, Torsten Slok, chief economist at asset management company Apollo, cautioned, "The difference between the IT bubble in the 1990s and the AI bubble today is that the top 10 companies in the SandP 500 today are more overvalued than they were in the 1990s." Private businesses like Elon Musk's xAI, which is currently valued at £50 billion, Anthropic, which is currently valued at £170 billion, and OpenAI are not the only ones. Thanks to the increasing demand for the semiconductors that drive intelligent chatbots, chipmaker Nvidia has grown to become the largest company in the world, valued at over £4 trillion. Companies with a stake in the sector, like Microsoft and even Meta, have reached all-time highs. Any company that has a stake in the boom has seen a surge in investors due to the hype. In fact, AI has been largely responsible for this year's stock market gains. All of the main indices would be flat if that were removed.

Why would barons of AI warn of a bubble?

As they warn that it won't last, the AI barons might be keeping an eye on their expenses. A few AI engineers have seen their salaries soar; according to reports, Meta, for instance, has paid top researchers up to £100 million in salary and stock options. With a bubble warning, they might think they can control that. Similarly, they might be trying to persuade some of their investors to adopt a more practical perspective on the worth of some of the top businesses so they won't be let down if they prove to be less valuable than they initially believed. Many good companies will be caught up in the storm if the bubble does burst.

In the event that artificial intelligence (AI) turns out to be anything like the internet when it first appeared in the late 1990s, we will witness massive investment in the sector, skyrocketing valuations, a catastrophic collapse, and the gradual emergence of a more resilient sector with long-term significance. However, the good businesses are just as much a part of that collapse as the bad ones. During the .com bubble burst, Amazon's share price plummeted by 90%, and the company only managed to survive through a round of brutal cost restructuring. Apple's stock dropped from £150 to just £13 before rising to become one of the largest corporations globally. Despite strong investor support, many other businesses went out of business entirely. For instance, Pets Dot Com shut down after an IPO of £80 million, and Webvan did the same after £800 million. Had the crash not occurred, they might have grown into large corporations.

It is easy for any business that is not yet financially independent to fail. Even a giant like Meta can be weakened. AI might be a bubble. It is difficult to think that profits will ever be significant enough to support many of the valuations, which appear irrational. Nevertheless, calling that out by the industry leaders is extremely dangerous. If the bubble pops, things will quickly spiral out of control and many good businesses, as well as the weaker ones, will be destroyed. The AI tycoons might become the ones who bring about their own downfall.