Is the AI Stock Bubble Bursting? Signs Point to Potential Slowdown

JJohn August 7, 2023 11:14 PM

The meteoric rise of AI (Artificial Intelligence) stocks is potentially hitting a snag, as companies start to report their second-quarter earnings. With some stocks underperforming and others not living up to high expectations, there are signs that the AI stock bubble might be about to burst.

Gradual AI earnings impact

Both Microsoft and AMD, considered software leaders in the AI space, have indicated that AI's contributions to their revenue won't be sudden but will take place gradually. This revelation has led to some apprehension in the stock market, with stocks underperforming as a result. AMD, despite projecting a massive AI accelerators market worth more than $150 billion by 2027, suffered a stock slide of over 7% in the following trading session. Investors and analysts are worried that expectations may have grown too high, too fast.

Past bubbles indicate potential burst

There is a historical precedent for a possible burst of the AI stock bubble. Edward Stanley, a prominent equity strategist at Morgan Stanley, analyzed 70 prior bubbles from the past century, including the dot-com surge and the recent cryptocurrency excitement. The median return for these bubbles over three years is 154%. He argues that, considering Nvidia's 200% surge this year, the AI stock rally is likely in its 'late innings'. However, he also notes that the AI bubble of 2023 isn't identical to previous ones, adding an additional layer of complexity to predictions.

Despite the insights from historical data, measuring the current AI stock rally is a difficult task. The AI index tracked by Morgan Stanley is up just 50% this year, dwarfed by the 200% surge in large cap tech. This makes gauging the extent of market exuberance for AI stocks challenging. Investors might think that AI investment funds are at all-time highs due to the excitement around Generative AI, but that isn't the case. As an investment theme, the performance is still 14% below the prior market high.

Little benefit from hyping AI success

In a somewhat surprising turn of events, companies that have been highly promotional about their AI successes aren't reaping the expected benefits this quarter. With the exception of Meta, which attributed its revenue boost to AI, investors seem more preoccupied with the present state of things rather than future potential AI benefits. Even Snap, which boasted an engagement of over 150 million users with its 'My AI' chatbot, saw its stock fall more than 14% after the company reported earnings. This shift suggests a potential cooling off of investor excitement for AI on Wall Street.

Nvidia, a key player in the AI sector, has seen its stock rise more than 200% this year, largely due to its AI prospects. However, there are signs that this rapid ascent may be slowing down. Over the last week, Nvidia's stock has dropped by 4% and is up just 6% over the last month. This slowdown suggests that the stock's meteoric rise might be taking a break, which could be an indicator of a wider slowdown in the AI stock rally.

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