The Canary In The Coal Mine: Is Nvidia The First Sign Of The AI Bubble Bursting?

🌈 Abstract

The article discusses the potential bursting of the AI market bubble, using Nvidia's recent earnings announcement as a case study. It examines the characteristics of market bubbles, analyzes the factors that suggest the AI industry may be in a bubble, and explores the potential implications of the bubble bursting.

🙋 Q&A

[01] Defining a Market Bubble

1. What is a market bubble?

• A market bubble occurs when investors pour money into a stock or industry, not based on solid business fundamentals, causing the value to inflate far beyond its actual worth.
• Examples of past market bubbles include the tulip mania of the 1600s, Japan's real estate bubble in the 1990s, and the dot-com bubble of the early 2000s.
• Bubbles eventually burst when a market correction awakens investors to the reality of the businesses/industry, leading to a mass stock sell-off and a crash that can impact other linked industries or even entire economies.

[02] The AI Industry Bubble

1. What evidence suggests the AI industry may be in a bubble?

• Nvidia, the largest AI company, has seen its stock price grow by 3,000% since 2019, while its revenue has only grown by 60% during the same period.
• Many other AI-based stocks, such as Tesla, have also experienced significant stock price growth that is not fully justified by their underlying business fundamentals.

2. What factors have contributed to the potential AI bubble?

• Investors have had very high expectations for AI companies, expecting them to continue growing at "spectacular rates" even as they already dominate the market.
• The business model of selling AI chips has been brought into question, as major AI customers like OpenAI may not be able to sustain exponential chip purchases due to the high energy costs of running next-generation AI models.
• Profitability concerns have been raised, as the cost of running the AI chips may outweigh the revenue generated, making it difficult for AI companies to see a return on their massive chip expenditures.

3. What are the potential implications of the AI bubble bursting?

• The article suggests that the recent sell-off of Nvidia stock, despite its record-breaking revenue, may be the first sign of the AI bubble starting to burst.
• A burst bubble could significantly impact the AI industry, as well as other linked industries or even the broader economy, as investors cash out before the "house of cards falls."