The AI gold rush faces a reality check

When Warren Buffett's firm recently sold off a large share of its Apple stock to increase its cash holdings, many analysts believe it sparked the recent global sell-off.

However, if you look beyond this single story, there’s an increasing belief that big tech has become too obsessed with AI. Sure, it's transformative, but there is uncertainty about whether it will ever make money.

When AI became the new sheriff in town, the "Magnificent Seven" (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) accounted for half of the S&P 500's total gains last year. Ultimately, this meant a handful of big tech players were increasingly propping up the S&P 500.

During the California Gold Rush, those selling shovels and supplies were often more successful than the prospectors panning for gold. 175 years later, companies like NVIDIA are profiting the most from an AI gold rush by selling AI chips.

However, many analysts questioned if AI was a bubble after shedding $550 billion in market value, causing it to lose its most valuable listed company status.

More recently, Microsoft shares dipped around the same time AI Capital expenditures surged to $56 Billion. Elsewhere, news also broke that the so-called Magnificent Seven was set to erase $800 billion in value and there is also increasing awareness of how AI is placing a huge strain on the world’s energy resources.

undefined#BigTech’s #AI arms race has a significant energy cost... A study found that training OpenAI’s GPT-4 used up to 62,000 megawatt-hours, equal to the energy needs of 1,000 U.S. households over 5-6 years.undefined https://t.co/LdrVpJX74D

undefined Jacek Debiec MD, PhD, DPhil 🌎 (@DebiecJacek) August 4, 2024

AI bubble or tech revolution?

With immense financial resources, big tech has invested heavily in AI development despite uncertainty about its direction. The sudden surge in AI investment is enabled by recent advances in computing power and big tech training AI models on vast internet datasets without facing significant legal repercussions.

This move has encouraged other companies to follow suit aggressively, but incoming regulations could spark a wave of lawsuits in the future.

A recent report revealed that OpenAI has spent $8.5 billion and is currently on track to lose $5 billion. To those outside the industry, Microsoft's substantial investment in AI is turning into a virtual money pit after it was also revealed that the tech giant spent $19 billion by the end of Q2 2024.

This is what a big tech bubble burst looks like:
Silicon valley over-hyped AI and failed to deliver.

NVIDIA down $325 billion
APPLE down $300 billion
GOOGLE down $200 billion
AMAZON down $135 billion
MICROSOFT down $125 billion
META down $80 billion
TESLA down $60 billion pic.twitter.com/372ApMKAXq

undefined Ewan Morrison (@MrEwanMorrison) August 5, 2024

Critics argue that expectations of immediate returns are unrealistic for such a transformative technology. But there is no escaping the fact that the amount of money OpenAI is burning through compared to what it currently makes is unsustainable. Although many suspect AI is becoming a bubble, no one knows how long it will continue to inflate.

AI startups that quickly raised millions of dollars during the hype cycle now find themselves in a precarious position. Any mention of the bubble word quickly turns into fear, uncertainty, and doubt, especially with escalating rumors of regulatory clampdowns.

Regulatory pressure

It has almost been a quarter of a century since antitrust laws convicted Microsoft of misusing the monopoly power of its Windows OS and ordered the company to be broken up. The result was the clear path for Google and Apple to build the empires we see today.

It was ironic that those very laws would curtail their ambition and open up opportunities for a new generation of companies to lead in a future ruled by rising technologies such as AI and quantum computing.

Earlier this year, the FTC opened an investigation into the investments, mergers, and acquisitions of tech's usual suspects. Be it Google, Meta, Apple, or Amazon, there is no escaping that accusations of reaching dominance through anti-competitive mergers have been put against this group of firms.

The Biden administration is sending what appears to be the clearest message that big tech's days of acquiring hundreds of small startups without scrutiny are numbered. But on the opposite side of the Atlantic, the European Parliament passed the first AI Act. The move threatens to ban AI applications that carry unacceptable risks to EU citizens' safety, livelihoods, and rights.

Behavioral manipulation, social scoring, and biometric identification are just a few of the areas where authorities are trying to curb the impacts of big tech on society. Make no mistake, the focus on regulating AI is well underway, and it's something to celebrate rather than fear. But these changes are making short-term thinkers and day traders nervous.

Short-term panic vs. long-term potential in AI investments

There are many parallels between the dot-com boom nearly thirty years ago and the AI revolution we are experiencing today. We have been here before, whether it be fears of job displacement, exaggerated technology capabilities, or unrealistic startup valuations.

When big tech went all in on AI, many believed the magnificent seven risked entering bubble territory. If we have learned anything from our tech past, we need to look at the bigger picture and dare to look beyond instant gratification and quick profits.

When Wall Street rebounded on Tuesday, there was widespread speculation that hedge funds could be publicizing their short positions to induce market panic and profit from a so-called bubble's collapse before buying back in. Others offered a more sensible view that fears were beginning to ease but warned we are not out of the woods yet.

Despite all the noise, nobody knows what will happen next in the increasingly volatile market. The only thing we know with certainty is that big tech's AI investment will take longer to pay off than many nervous investors would like.

As AI approaches its Oppenheimer moment, maybe investors should take comfort from Microsoft's former CEO, Bill Gates, who famously said, "Most people overestimate what they can achieve in one year and underestimate what they can achieve in ten years."