Not Every AI Stock Is A Bubble

Are AI Valuations Justified?

AI-related stocks in the U.S. may be approaching bubble territory, but opinions are sharply divided among experts.

Some analysts warn of overvaluation and speculative excess, while others argue that strong fundamentals justify current prices.

Sam Altman, Jeff Bezos, and David Solomon of Goldman Sachs have all warned recently that AI is a bubble.

The recent trend of circular financing in the AI industry, which includes Nvidia’s investments in OpenAI and xAI, as well as OpenAI’s investment in AMD, has raised concerns about ecosystem insularity.

Companies may appear more successful due to internal ecosystem spending rather than broad market adoption. That could inflate valuations.

However, equity strategists at Morgan Stanley and Goldman Sachs (yes, the same Goldman Sachs) published research recently outlining why AI stocks are not in a bubble.

So who is right?

Our view is that the bubble isn’t that AI stocks are at insane valuations.

The bubble is that not every AI stock can win.  

However, the market is pricing every single one of them as a winner.

That happened with the internet bubble.

When the peak came, the losers corrected 80 to 90% and some disappeared. The winners were already priced as winners and therefore performed relatively better when the market sold off.

Bill Gates, in the late 1990s, said that in the next 1 to 3 years, the internet will underdeliver on what you think, and over the next 10 years, it will overdeliver.

That will likely be the same for AI.

At its last earnings report, Microsoft suggested “the next 15 years and beyond” is the timeline investors should prepare to wait for material returns on the infrastructure build-out needed to power AI. 

Competition

While the DeepSeek news has been largely forgotten, DeepSeek has continued to develop and improve. DeepSeek is not going away.

The competition that U.S. technology companies will face from China, over the next 5 to 10 years, both in terms of AI and semiconductor chips, is not insignificant.

It will impact the ability of U.S. companies to both sell technology into China and compete with China for customers globally.

While high valuations don’t necessarily mean that the stock market has to decline, over the next few years, some companies will fail to meet the lofty earnings expectations, and the market will flatten out.  

While it may not end well for some participants in the race, it could be beneficial for those who integrate AI into their daily lives at the household or business level.  

The cost of utilising AI from a user perspective could collapse due to excess capacity.

A significant amount of capital will be destroyed in the end, but there will be beneficiaries and there will be winners.