Major banking institutions can't agree on whether the AI industry is already a bubble or if we're not quite there yet. Both the Bank of England (BOE) and International Monetary Fund (IMF) issued warnings this Wednesday that there was a risk of a sharp market correction akin to the dotcom era crash if AI investor mood turned sour. They highlighted soaring gold prices as an indicator that investors were hedging their bets, according to CNBC. Goldman Sachs is less concerned, claiming that while there is a risk we end up in a bubble, we're not there yet, as per Sherwood.
The question of whether the AI industry was developing into a bubble has been raised many times in recent months following announcements of gargantuan investments in various AI companies and their infrastructure all over the world. Many of these investments have been circular, with the same companies buoying each other's stock prices and potential future revenue streams. But while some of the major faces in this industry may brush off concerns of overvaluation affecting their businesses specifically - even if it might hit others - the banks are starting to show concern.
Ahead of its annual meeting this week in Washington, IMF head Kristalina Georgieva told CNBC that there were "worrying signs" of a large market correction in the future. Gold purchasing was one sign, but so were the skyrocketing stock market valuations of some of the largest AI companies.
ChatGPT maker, OpenAI, isn't publicly traded, but was recently valued at over $500 billion ahead of a potential IPO next year. Its revenue for the first half of the year was only just over $4.3 billion, with no signs it will generate any kind of profit this year, or for many years to come, according to CEO Sam Altman himself.
The Bank of England has also warned of the risk of a "sharp market correction," which has increased in recent months, and that AI company valuations seem inflated. This was based on "disappointing AI capability/adoption progress or increased competition," the BOE noted. The danger is that if and when a re-evaluation of potential earnings is made with updates for the current state of the industry, many of the companies promising big returns may fall afoul of adjusted projections.
It also highlighted the potential issue of material bottlenecks slowing the progress the AI industry is rushing towards. Power, data, and commodity supply chains, and even "conceptual breakthroughs which change the anticipated AI infrastructure requirements for the development and utilisation of powerful AI models," could all impact industry growth and hasten a downturn.
CNBC interviewed senior investment strategist Joost van Leenders on the potential for a market bubble. Although he suggested that the profit margins of major tech companies were largely sustainable, it was the circular investments that raised concerns of a bubble.
“When you look at, for example, investment in AI and the growth in investment, and the fact that some of these companies are financing each other and buying each other’s stocks. I think those are also signals of a bubble," he said. “So, if you think of a bubble of about five stages, we’re probably in stage three."
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