Bubble or not, AI continues to draw billions in investments

Depending on who you ask, we’re in the midst of an AI bubble or an AI boom. OpenAI (OPAI.PVT), a company that hasn’t turned a profit, is spending billions building out data centers to power its artificial intelligence offerings.

On Monday, the company inked a multiyear, multibillion-dollar deal with AMD (AMD) that will see the chipmaker provide next-generation GPUs to OpenAI, which will also have the opportunity to purchase up to 10% of the company. Nvidia (NVDA), in turn, is pouring $100 billion into OpenAI, which is also a major customer.

Meanwhile, tech giants Amazon (AMZN), Google (GOOG, GOOGL), Meta (META), and Microsoft (MSFT) continue to spend billions on their own AI data centers. Then there’s the $40 billion Oracle (ORCL) is spending on Nvidia chips to power OpenAI’s Project Stargate, the Financial Times reported in May.

It all makes for a rather confusing array of deals and moves that continue to raise questions about when exactly all of this spending will turn into profits, not to mention the specter of the dot-com crash of the early 2000s.

But even if the AI hype cycle plays out like the dot-com bubble, a good amount of that investment in AI infrastructure will still pay off, at least in the long run.

“I actually do believe that there is significant long-term demand,” Ram Bala, associate professor of business analytics at the Leavey School of Business at Santa Clara University, told Yahoo Finance.

“I think it’s definitely going to pan out. The macroeconomic challenge is … there’s probably going to be this intermediate phase where it seems like we overbuilt a lot of this and demand isn’t quite catching up to all of that.”

Fears of an AI bubble have been percolating for months as AI stock prices and corporate valuations have continued to soar. Nvidia, the world’s AI chip leader, has a market capitalization north of $4.5 trillion. On top of that, OpenAI is now valued at $500 billion, more than Elon Musk’s SpaceX (SPAX.PVT), which is valued at $400 billion.

The explosion in AI interest and the promise of future riches have also sent Microsoft and Google’s valuations above the $3 trillion mark, with Microsoft quickly closing in on $4 trillion.

It’s enough to raise the hair on anyone’s neck.

Amazon founder Jeff Bezos last week said that we’re likely witnessing an AI bubble during a discussion at Italian Tech Week, but he added that some of those investments will eventually pay off.

“When people get very excited, as they are today, about artificial intelligence, for example … every experiment gets funded, every company gets funded,” Bezos said. “The good ideas and the bad ideas. And investors have a hard time in the middle of this excitement, distinguishing between the good ideas and bad ideas.”

Bezos pointed to a company with six employees that’s raised billions of dollars without having a product yet, though he didn’t name the firm.

Goldman Sachs CEO David Solomon raised similar concerns during the same tech conference, saying, “Whenever we’ve historically had a significant acceleration in a new technology that creates a lot of capital formation and therefore lots of interesting new companies around it, you generally see the market run ahead of the potential, because there are going to be winners and losers.”

Even AMD and OpenAI’s chip deal isn’t necessarily a sure bet. Bernstein’s Stacy Rasgon notes that the chipmaker’s processors don’t even exist yet, and it’s never built out an AI project of this scale. What’s more, the company’s stock warrants, he said, will continue to fuel the “circular” concerns about industry spending.

“In this case it feels even more roundabout than NVDA’s deal, at least they are receiving OpenAI stock for their cash investment, while AMD is giving up their equity while receiving nothing beyond the revenue in return,” Rasgon wrote in a note to investors.

According to Bala, the broader fear of an AI bubble bursting like the dot-com bubble may be a near-term concern, but in the long run, heavy investments will prove worthwhile. It’s just a matter of understanding when AI use cases for consumers and enterprises will come into focus.

“I think if you compare the late ’90s, about only 50% of the people were … using the internet, and now it’s like close to 100% nearly, right?” he said.

“So I think what happened over time is that the infrastructure did pan out in the sense … of just being able to sell the demand that came through eventually.”

When does that happen for the AI trade? Think 2030.

“What I do believe is that you’re going to see post-2030 … AI diffused in pretty much everything you do, in the sense that many of the common software products that you use on a day-to-day basis actually [have] a ton of AI in [them],” Bala said.

Email Daniel Howley at dhowley@yahoofinance.com. Follow him on X/Twitter at @DanielHowley.

Click here for the latest technology news that will impact the stock market

Read the latest financial and business news from Yahoo Finance

Depending on who you ask, we’re in the midst of an AI bubble or an AI boom. OpenAI (OPAI.PVT), a company that hasn’t turned a profit, is spending billions building out data centers to power its artificial intelligence offerings.

On Monday, the company inked a multiyear, multibillion-dollar deal with AMD (AMD) that will see the chipmaker provide next-generation GPUs to OpenAI, which will also have the opportunity to purchase up to 10% of the company. Nvidia (NVDA), in turn, is pouring $100 billion into OpenAI, which is also a major customer.

Meanwhile, tech giants Amazon (AMZN), Google (GOOG, GOOGL), Meta (META), and Microsoft (MSFT) continue to spend billions on their own AI data centers. Then there’s the $40 billion Oracle (ORCL) is spending on Nvidia chips to power OpenAI’s Project Stargate, the Financial Times reported in May.

It all makes for a rather confusing array of deals and moves that continue to raise questions about when exactly all of this spending will turn into profits, not to mention the specter of the dot-com crash of the early 2000s.

But even if the AI hype cycle plays out like the dot-com bubble, a good amount of that investment in AI infrastructure will still pay off, at least in the long run.

“I actually do believe that there is significant long-term demand,” Ram Bala, associate professor of business analytics at the Leavey School of Business at Santa Clara University, told Yahoo Finance.

“I think it’s definitely going to pan out. The macroeconomic challenge is … there’s probably going to be this intermediate phase where it seems like we overbuilt a lot of this and demand isn’t quite catching up to all of that.”

Fears of an AI bubble have been percolating for months as AI stock prices and corporate valuations have continued to soar. Nvidia, the world’s AI chip leader, has a market capitalization north of $4.5 trillion. On top of that, OpenAI is now valued at $500 billion, more than Elon Musk’s SpaceX (SPAX.PVT), which is valued at $400 billion.

The explosion in AI interest and the promise of future riches have also sent Microsoft and Google’s valuations above the $3 trillion mark, with Microsoft quickly closing in on $4 trillion.

It’s enough to raise the hair on anyone’s neck.

Amazon founder Jeff Bezos last week said that we’re likely witnessing an AI bubble during a discussion at Italian Tech Week, but he added that some of those investments will eventually pay off.

“When people get very excited, as they are today, about artificial intelligence, for example … every experiment gets funded, every company gets funded,” Bezos said. “The good ideas and the bad ideas. And investors have a hard time in the middle of this excitement, distinguishing between the good ideas and bad ideas.”

Bezos pointed to a company with six employees that’s raised billions of dollars without having a product yet, though he didn’t name the firm.

Goldman Sachs CEO David Solomon raised similar concerns during the same tech conference, saying, “Whenever we’ve historically had a significant acceleration in a new technology that creates a lot of capital formation and therefore lots of interesting new companies around it, you generally see the market run ahead of the potential, because there are going to be winners and losers.”

Even AMD and OpenAI’s chip deal isn’t necessarily a sure bet. Bernstein’s Stacy Rasgon notes that the chipmaker’s processors don’t even exist yet, and it’s never built out an AI project of this scale. What’s more, the company’s stock warrants, he said, will continue to fuel the “circular” concerns about industry spending.

“In this case it feels even more roundabout than NVDA’s deal, at least they are receiving OpenAI stock for their cash investment, while AMD is giving up their equity while receiving nothing beyond the revenue in return,” Rasgon wrote in a note to investors.

According to Bala, the broader fear of an AI bubble bursting like the dot-com bubble may be a near-term concern, but in the long run, heavy investments will prove worthwhile. It’s just a matter of understanding when AI use cases for consumers and enterprises will come into focus.

“I think if you compare the late ’90s, about only 50% of the people were … using the internet, and now it’s like close to 100% nearly, right?” he said.

“So I think what happened over time is that the infrastructure did pan out in the sense … of just being able to sell the demand that came through eventually.”

When does that happen for the AI trade? Think 2030.

“What I do believe is that you’re going to see post-2030 … AI diffused in pretty much everything you do, in the sense that many of the common software products that you use on a day-to-day basis actually [have] a ton of AI in [them],” Bala said.

Email Daniel Howley at dhowley@yahoofinance.com. Follow him on X/Twitter at @DanielHowley.

Click here for the latest technology news that will impact the stock market

Read the latest financial and business news from Yahoo Finance