AI bubble update - 2 Trillion market value lost
Marco van Hurne
I build Agentic AI companies | Data Science Strategist @ Beyond the Cloud | Data Strategy Certified | AI Compliance Officer Certified
If you remember how I mentioned that an AI bubble was on the horizon? I performed an analysis of the valuation of all the major tech stock that were profiting from the AI hype - a total value of 11 Trillion USD, which was an 80% increase within a half year.
Well, turns out I wasn't too far off the mark.
The signs were there all along, and now we're seeing the aftermath unfold right before our eyes. The Nasdaq 100 has taken a nosedive into correction territory, shedding over $2 trillion in value.
Can you believe it?
?? 2 Trillion ??
This was its biggest one-day percentage drop since at least 1982, according to data compiled by Bloomberg.
All the big players - Amazon, Tesla, Nvidia, Microsoft, Intel, and Google - they're all feeling the heat. It's like watching a roller coaster, the way these stocks soared and then came crashing down. The tech giants are now facing a harsh dose of reality.
Before we start!
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Back in February, I had a hunch that the AI hype wasn't going to last.
Companies were throwing billions at AI without much to show for it.
And now, a half year later, things have taken a turn for the worse. The Nasdaq's steep decline is a clear sign that people (and the "market") are starting to see the limitations of AI. Investors are no longer content to blindly trust in the promise of AI-driven growth without seeing tangible results.
It's a familiar story in the tech world, isn't it?
Of course y'all have heard of the Gartner Hype Cycle.
It's a great way to make sense of what's happening. This model shows the typical trajectory of new technologies. It all starts with the "Innovation Trigger," where interest in the technology reaches its peak. Then comes the "Peak of Inflated Expectations," where the hype is at an all-time high. And finally, we find ourselves in the dreaded "Trough of Disillusionment." This is where negative press takes over, the first wave of startups fail, and people start to realize that the technology isn't as groundbreaking as they thought.
Right now, we're on the right shoulder, looking into the abyss of the Trough of Disillusionment.
The signs are everywhere.
Negative press is dominating the headlines.
The media is filled with stories questioning the viability of AI.
Startups that once seemed promising are now struggling to keep their heads above water or shutting down altogether. Many AI startups are finding it tough to survive in this unforgiving new landscape. Even the big players in the industry are pulling back. Microsoft backed out of Pi, which raised a lot of eyebrows. The CEO of Character AI returned to Google, signaling trouble in the AI startup world. These aren't isolated incidents; they're part of a bigger trend.
Microsoft's retreat from Pi caught a lot of people off guard.
The company had invested heavily in this AI venture, but in the end, they decided to take a step back. This move was a clear indication that even the biggest companies are re-evaluating their AI strategies. Character AI also hit some bumps in the road. When the CEO decided to go back to Google, it set off alarm bells in the industry. It suggested that the company was having a hard time finding its footing in a competitive market.
Intel's recent performance has been nothing short of dismal.
The company's stock took a nosedive, plummeting 26% in a single day after a grim forecast.
This was the biggest drop since 1982.
Investors were spooked by the company's heavy AI spending and lack of tangible results. Amazon has also faced significant challenges. The company fell nearly 9% due to heavy AI spending with little to show for it. These examples highlight the growing skepticism around AI.
Tesla's full self-driving technology is another source of frustration.
Despite all the promises that Elon Musk has been making over the last years, the technology still requires a human driver. It is also plagued by safety issues. AI chatbots have also struggled to find their place. Many chatbots don't have a clear path to monetization and often make mistakes. This has led to growing doubts about their long-term viability.
What is your burn rate?
Remember the question that entrepreneurs were asked in the early days of eCommerce, before the bubble burst: "What is your burn-rate"? Burn rate meant the money you spent in order to gain market share. And the more you spent, the larger your potential market share would be. It's like the good ol' days are back!
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In the last quarter alone, Apple, Amazon, Meta, Microsoft and Google’s parent company Alphabet spent a combined $59 billion on capital expenses. Now that is a whopping 63 percent more than a year earlier and 161 percent more than four years ago. A large part of that was funneled into building data centers and packing them with new computer systems to build artificial intelligence. Only Apple has not dramatically increased spending because it does not build the most advanced A.I. systems itself.
Red flags have been waving for the better part of the year.
Tech stocks are just too expensive.
I'd rather buy Bitcoin instead of the hyped up NVIDIA stock.
AI-fueled gains are overdone.
The market is too concentrated. High-profile earnings disappointments cemented those views. Investors are now heeding those warnings, pocketing gains and plowing into previous laggards, like utilities. These have been leading the market over the past two sessions. Treasury yields are tumbling as traders bet on the Federal Reserve cutting interest rates at its next meeting in September.
A little side note: I don't think they'd be doing this kind of spending if demand wasn't there.
This bodes well for the long-term AI story.
However, there are all kinds of questions about the timing of AI demand, AI spending, and this kind of selling are the bumps in the road that come with that kind of thing. There have been some bright spots. Apple Inc. rose 0.7% following a positive earnings report. Meta Platforms Inc. rose earlier this week on its own results.
Investors' fears can be boiled down to: is all of this actually worth anything? Or is it just another shiny object the industry is chasing to bring back its dreams of endless growth, before it abandons it and moves onto the next big thing? As Morgan Stanley analyst Keith Weiss put it on Microsoft's earnings call: Right now, there's an industry debate raging around the capital expenditure requirements around generative AI and whether the monetization is actually going to match with that.
The violent rotation from Big Tech has hit the Nasdaq 100 hard.
Nvidia and Tesla are down over 20%, entering bear-market territory. Microsoft and Amazon have both lost over 10%. Investors are worried that AI spending won't pay off soon, if ever. The market impact has been severe. The once high-flying tech stocks are now struggling to maintain their value. The sudden decline has wiped out over $2 trillion in value. This dramatic shift has left many investors scrambling for answers.
The about face of the tech sector wiped out more than $2 trillion in value in just over three weeks. Traders have been unwinding bets that had been minting money for over a year. Several megacaps have seen concentrated selling. Both Nvidia Corp. and Tesla Inc. are down more than 20% from recent highs, putting them in bear-market territory. Meanwhile, Microsoft Corp. and Amazon Inc. have each lost more than 10%. With the exception of Tesla, major big tech stocks remain higher for the year.
It's like we've crashed into a brick wall, people!
We had a heck of a straight line up, and those don't last forever. Expectations got too high. You clearly can't just own tech. You need some exposure to the more defensive areas. Amazon and Intel Corp. were among the biggest decliners. Amazon fell 8.8% on heavy AI spending plans, while Intel plummeted 26% on a grim forecast.
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Shares of both Google and Microsoft dipped following their earnings reports, a sign of investors' discontent that their huge AI investments hadn't led to far-better-than-expected results. Meta, which experienced similar shareholder frustration last quarter, avoided the same fate this time around by showing how its AI investments were at least contributing to its core business, including by enabling companies to easily make compelling ads with its AI tools.
Tech leaders have said that what they need is more time. A lot more time. Microsoft CFO Amy Hood said on the company's earnings call that its data center investments are expected to support monetization of its AI technology over the next 15 years and beyond. Meta, similarly, anticipates returns from generative AI to come in over a longer period of time. CFO Susan Li told analysts: Gen AI is where we're much earlier. We don't expect our gen AI products to be a meaningful driver of revenue in 2024. But we do expect that they're going to open up new revenue opportunities over time that will enable us to generate a solid return off of our investment.
Some investors question whether AI investments will ever pay off.
Goldman Sachs analyst Jim Covello argued that the technology isn't designed to solve the complex problems that would justify the costs in last week's report. As an example of just how long it can take AI products to come to fruition, take Tesla's AI-based full self-driving technology. Tesla has sold the driver-assist technology as key to the company's business plan since 2015, and consistently promised that it would be fully capable within a short timeframe. But FSD still requires an attentive human driver capable of taking the wheel in case something goes wrong, and is regularly plagued by safety concerns, nearly four years after it was first released to Tesla customers.
For now, tech CEOs appear to agree that the risk of underinvesting is dramatically greater than the risk of overinvesting. As Google's Pichai said in last week's earnings call, a similar line was repeated by Meta CEO Mark Zuckerberg during his company's call. Data centers take time to build. If someone is going to come out the winner in the AI race, no company wants to miss their shot at the top simply because they didn't have enough computing capacity. They're earning enough from their core businesses that investors will put up with the spending for now.
Hey, if you want to dive deeper into this whole AI bubble situation, I've got some articles that might pique your interest. They offer more insights and perspectives on the potential burst.
What’s Next?
Now, don't get me wrong, this isn't the end of the road for AI. It's more like a reality check. The technology still holds promise, but we need to keep our expectations in check. Investors will likely demand more tangible results before they keep pouring money into AI. Recognizing the signs early can help you navigate this volatile market more effectively. So, keep your eyes peeled for more developments as we make our way through this challenging phase.
Anyway, that's my take on the whole AI bubble situation. It's been a wild ride, but we'll see where it takes us. Stay tuned for more updates as things unfold. Take care, Marco! Until next time.
Well, that's a wrap for today. Tomorrow, I'll have a fresh episode of TechTonic Shifts for you. If you enjoy my writing and want to support my work, feel free to buy me a coffee ??
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Signing off - Marco
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3 个月It's always important to keep an eye on the shifting tides of the AI market. Your insights into the deflation of the AI bubble are invaluable, Marco van Hurne. Your expertise in Machine Learning and AI is truly commendable.
Digital Transformation Leader || Bridging Technology & Business Strategy || CIO ● CTO ● Advisor ● Consultant
3 个月Interesting read!
Shall we make a difference together???????????
3 个月Nicely described Marco It's enlightening! ??
Performance expert across the stack; also expert with accessible SVG data visualisations
3 个月Genuinely didn't need to read more than the title, but I'm going to give the article the ten mins it requests :-)
Mentor (CEO's / CXO's), Leadership Trainer, Board Advisor (Digital Transformation, Cyber Security, AI, Innovation) Design Thinker & Innovator !!! Meditator, Singer & Cook !!!
3 个月Marco van Hurne ??????