The AI Bubble Is Bursting, Experts Say

"When activity is only slightly disappointing, those large tech companies are being taken to the woodshed."

Boom

Is AI hype bubble popping? Some experts say yes.

The stock market has seen a rough week, with a mass selloff caused in large part by Wall Street recession fears and still-high interest rates triggering a sharp downturn. One of the hardest-hit areas of the economy was the AI industry, which saw the stock prices of Big Tech behemoths and major AI players like Microsoft, Google, Nvidia, Meta and more lurch downward. Per The Wall Street Journal, as of Monday the class of tech giants known as the "Magnificent Seven" — a list that also includes Amazon, Apple, and Tesla — had lost a collective $650 billion.

The AI industry's reaction to the market fallout is significant, given how much money companies and investors have poured into the tech. As it stands, per Vox, AI is a trillion dollar industry — and with that kind of investment pouring in, you'd maybe think that it would have the kind of economic output that could better weather a market downturn.

Clearly, though, this wasn't the case — and once again, experts are ringing the alarm bells.

"Over the last year or so, the continued stellar performance from the Magnificent Seven has justified" high valuations, wrote equity William Blair equity researcher Richard de Chazal in an analysis on Friday, according to Fortune. "Now, however, when activity is only slightly disappointing, those large tech companies are being taken to the woodshed."

Make It Make Sense

In other words, if a trillion-dollar industry in the throes of a gold rush crashes in the face of slight unpredictability, how much is that industry really worth?

Even analysts at Goldman Sachs seem to agree that some of the hype around AI has been visible in this week's downturn.

"You get these waves of both investment-digestion and hype-reality," Brook Dane, a Goldman Sachs portfolio manager, said in a Monday report. "And the two of them play out across a multi-year horizon."

This isn't to say that AI — generative AI products like OpenAI's ChatGPT or Google's AI Overview included — will suddenly go away. But right now, AI companies are burning through mountains of cash and have yet to produce an easily monetizable product that doesn't also make embarrassing errors. Not a confidence-inducing business model!

At the end of the day, proponents argue that AI is the future, which broadly speaking may well be true. This week's cratering, however, seems to signal that in its nascency, the hype-powered AI industry is still more of a house of cards than anything solid.

More on AI's questionable business model: Microsoft Is Losing a Staggering Amount of Money on AI