What if AI is a Dud?

The recent run up of Artificial Intelligence (AI) and AI adjacent companies has caught the attention of many types of investors. Companies like Google, Microsoft, Nvidia, and Super Micro have benefited from the future benefits that AI is expected to bring. Anyone fortunate enough to hold these stocks has benefited greatly in the past year.

If AI is just beginning, I’m not exaggerating by saying that we should expect a revolution that changes the way we interpret information, do business, do web searches, and many other aspects of life. (My examples are sorely limited because my brain can’t yet comprehend the potential use cases AI might bring.)

If AI is a dud, like most cryptocurrencies have proved to be, there could be a potential correction with the recent AI leaders in the stock market. I use cryptocurrencies as a comparison because the technology had promise and heightened expectations. Most importantly, cryptocurrencies focused on hype because the promising use cases just weren’t realistic, yet. I can see more usefulness for AI compared to crypto at this moment. Much more.

If an investment has done well recently, that’s not a predictor of what the future will hold. That’s the underlying risk of increasing concentration in recent winners.

Possible signs of an AI bubble:

AI startups with limited proven track records receive high valuations based on future potential rather than current performance. If you notice stocks, where there a no profits, making new highs on hype, be skeptical of it as an investment.

Remember when Long Island Iced Tea changed its name to Long Blockchain Corp? Its stock popped 200% when the name change was announced. Four years later the SEC charged the biggest shareholders with insider trading.  

Unrealistic expectations and fear of missing out drive people to invest in AI without thorough evaluation. If someone you know, who has zero financial experience is spouting off about how much money they made on an AI stock, ignore them.

Overinflated valuations eventually correct, leading to significant losses for investors and potentially hindering further AI development. A company like Microsoft has lots of other business lines that aren’t related to AI. While the stock price might drop, it’s still a well-diversified company.

Public disappointment might erode trust in AI, slowing down responsible development and adoption. The New York Times has sued AI companies who have trained their models on copyrighted content. There’s also the question of whose work is ultimately being used in an AI output.

There are still plenty of reasons to be optimistic about AI.

AI has potential across various sectors, mitigating the risk of a single point of failure. AI is used for video and graphical outputs, reducing the need for graphic designers. It can also scan long articles which reduces the need for copyrighters. There are so many real world use cases that any one roadblock won’t hinder broad AI adoption.

Also, what if the significant amount of money companies are investing in AI turns out to yield less incremental revenue than planned, and those costs ultimately lead to declining profits? That would be bad for stock prices. From what I can see, pricing of various AI products is all over the board, which means companies don’t really know where the market is for demand for their products.

Microsoft is pricing their Copilot product add on at $30 per user per month for a business subscription. Are users willing to pay that price? Are Microsoft’s costs covered at that price at scale? I think all these questions will be answered in the coming quarters and years as we all watch adoption for these types of services grow.

It's impossible to predict with certainty whether an AI bubble will occur. However, understanding the potential signs and consequences is crucial for informed decision-making, both for investors and stakeholders in the AI ecosystem. Ultimately, responsible development, realistic expectations, and continuous evaluation are key to ensuring that AI's potential is realized without falling prey to unsustainable hype.

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