The warnings are coming in fast and furious. Yesterday the CEO of Klarna (KLAR), Sebastian Siemiatkowski, is reported to be ‘nervous’ about the gigantic scale of investments made by AI companies.
Today, the CEO of Google (GOOG), Sundar Pichai, also voiced his worry about the presence of some ‘irrationality’ in the booming AI industry. “No one,” he cautioned in a BBC interview, “ is going to be immune” if the AI bubble collapses.
What exactly is causing investors and leading tech executives so much angst?
Meteorite pricing of AI companies aside, it is the intense spending among AI firms that is weighing on investor expectations.
The uncontrolled and vast expansion of the AI infrastructure – from massive data centres to multi-billion chip deals – is causing investors to question the viability of these tech projects.
Are these capital investment sustainable? More importantly, will they generate sufficient future revenue and profits?
The investment idea that ‘build and revenue will come’ is a dangerous one. Time and again, history showed us that over-spending caused a deep retrenchment later on. This time, even cash-rich tech firms are increasing their debt levels to splurge on AI. Not a good sign.
If we look at the equity prices of AI firms, they do appear toppy.
Take the Global X AI and Tech ETF (AIQ). Prices have clearly lost upward momentum and formed a peak pattern. A break of the support area (highlighted by me) will suggest more price declines.
Accordingly, if long one should stand ready to reduce exposure on worsening market sentiment towards AI instruments.
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