When the US stock markets opened for trading on early Monday morning, major tech companies saw around $1 trillion wiped out in market cap. NVIDIA, the company whose stocks soared so much this year that it became the most valuable company in the world for a short period of time, lost around $300 billion in market cap.
Companies the likes of Amazon, Meta, Google, Apple, Tesla, and Microsoft have similarly lost significantly in the last few days. There is a growing concern among investors that the market cap for tech companies surged quickly due to the generative AI boom, making them expensive, and that the massive investments in AI might not yield substantial profit for quite some time.
In some sense, this is true. Meta, which recently released Llama 3.1, the most advanced open-source large language model (LLM) to date, has invested nearly $40 billion in AI. Even though Mark Zuckerberg has a plan to earn it all back, it may take many years. Investors might not be willing to make such a long bet.
The same goes for other companies investing heavily in AI like Google and Microsoft. From their perspective, investing in AI makes sense too. They don’t want to miss out on a technology that many believe could redefine the global economy and order of things.
Sundar Pichai, CEO of Alphabet, has stated that the company prefers to over-invest in AI and not achieve immediate results rather than under-invest and risk missing out on potential opportunities. But again, investors might not agree.
Here, it is important to take into consideration that shifting investor sentiments are not the sole reason for the plunging stock market. Investor sentiment was positive earlier this year due to expectations that the Fed would lower interest rates. However, sentiment shifted when data showed a decline in manufacturing and construction and a weaker-than-expected job market.
Not a Dotcom Bubble
Many experts AIM spoke to have voiced a common opinion that there is indeed an AI hype, and some of them even hold the media accountable for inflating the bubble.
“Journalists not only have the ability, but also the responsibility, to educate the general public on AI. Currently, with all the scaremongering and sensationalising, they’re not doing that,” Mikael Kopteff, Reaktor’s chief technology officer, told the BBC.
Inflated stocks are also reminiscent of the dotcom bubble. The horrors of 2000 hang over Wall Street like a dark cloud which it still struggles to shake off.
However, many feel the comparison to the dotcom bubble in 2000 might not be entirely apt. The stocks that peaked in the late 90s during the dotcom boom were mostly startups and had different business models compared to current companies like Google, Microsoft and Meta.
These companies have invested billions in AI, and even if these investments do not yield immediate results, they are unlikely to go bankrupt. They possess substantial reserves and have diversified business interests that provide financial stability.
“They can lose billions of dollars and not go broke,” Erik Gordon, a professor at the University of Michigan’s Ross School, told Business Insider.
Google and Meta will continue to earn billions from ads, Apple will continue to sell new iPhones, and Microsoft will continue to sell enterprise software.
Since 2000, the market and its investors have also evolved. Moreover, experts believe that the true value of AI will become clear eventually.
Tanvir Khan, executive vice president of cloud, infrastructure, digital workplace services, and platforms at NTT DATA, previously told AIM that generative AI is relatively new. It took many years for internet products to evolve.
“You can actually draw parallels to the internet. Things like online banking and online brokerages took longer to emerge, even though the internet was there for a while. Hence, these types of use cases at scale might be a couple of years away,” he said.
While AI has the potential to be transformational, this will take time. The current hype is driven by promises of what AI might achieve in the next five to ten years, creating unrealistic expectations.
It’s a Market Correction
Over $1 trillion wiped out in market cap could be the aftermath of AI hype. To sustain investor confidence, these tech behemoths were required to announce strong earnings from AI, which did not happen.
For instance, Microsoft, in its recent earnings call, reported a revenue growth of 29 per cent in the fiscal fourth quarter, compared to a 31 per cent rise in the previous period. Of the recent quarter’s growth, approximately eight percentage points were due to AI, jumping just one percentage point from seven percentage points in the previous quarter.
This gap between expected and actual performance has led to a wave of sell-offs resulting in market correction. Moreover, overvalued tech company stocks aren’t new. A similar sell-off was seen in late 2022. During COVID, tech stocks similarly surged with a greater emphasis placed on technology as we started to work remotely.
Investor sentiments were high and the stocks of many tech companies soared amidst the global pandemic. Soon, lockdowns were lifted across the globe and the market corrected itself–Apple lost around $220 billion in valuation and Microsoft lost around $189 billion, while Alphabet’s valuation was down by $123 billion.
The Bubble Might Still Burst
It’s hard to predict investor sentiment and what’s coming next for these tech companies. However, many experts pointed out the difference between software and hardware companies.
While Microsoft might continue to sell enterprise softwares, NVIDIA, which sells graphics processing units (GPUs) might have a hard time if their customers stop buying these often coveted pieces of hardware. Moreover, their biggest customers–hyperscalers–have started making their own AI chips.
“The bigger disappointment could be in the hardware stocks. If investors are counting on the current growth rates for equipment hardware that supports the growth of AI to continue, they may be disappointed,” Gil Luria, an analyst with D.A. Davidson, told Quartz.
Luria even draws parallels with Cisco Systems, a company whose products were instrumental in creating early internet infrastructure and whose success came to symbolise the dotcom era.
Interestingly, many predicted that Cisco would be the world’s most valuable company back then. Nonetheless, it’s hard to predict where the market will head. But one thing is certain: if these companies fail to take investors into confidence and show what value lies in AI, things could go south.
