Barely a day goes by without major news breaking in the world of artificial intelligence. Just today, Stanford University's AI leader, Fei-Fei Li, reported that her $1 billion start-up, World Labs, has already raised two rounds of funding from top investors like Andreessen Horowitz and Radical Ventures. Li’s ambition to create spatial intelligence in AI, enabling machines to process visual data, is the latest in a slew of billion-dollar AI projects appearing with increasing regularity.
World Labs exemplifies the recent explosion of investment into the AI sector. In the past three months alone, American AI startups have seen more than $27 billion in investment, with global AI investments reaching around $50 billion. As the money flows in, a critical question looms: Is the AI space becoming a bubble?
If any company typifies the AI industry's boom, it’s Nvidia, the leader in AI computing. Nvidia's stock price has surged over 160% since the start of the year, and over the past five years, it has skyrocketed by a staggering 3000%. Such figures are more commonly seen in the volatile cryptocurrency markets than on Nasdaq. Retail investors, motivated by the hype around AI developments and new tools like ChatGPT, have been pouring money into Nvidia. As a result, it became the third most popular stock in the country in the second quarter of this year.
Meanwhile, other AI-driven companies like Dell and Broadcom also see rising interest, with the number of UK investors holding these stocks increasing by about 40%. However, not everyone is convinced these are solid investment opportunities. Terry Smith, founder and chief executive of Fundsmith, has notably shunned Nvidia, citing its unpredictability.
Echoing Smith’s sentiments, Sean Peche, Portfolio Manager at Ranmore Fund Management, remarked, “We fully understand and concur with Terry Smith’s stance on Nvidia. Nvidia is a fantastic company, but if you overpay for the prospects of great businesses, they can still be very poor investments, especially in the tech world where competition is rampant.” Peche points out that other giants like Nokia and Netscape were once dominant but later declined, suggesting that investing in Nvidia now could be risky.
Peche elaborates that unlike other tech firms, many of Nvidia's large customers are developing their own AI chips, posing a unique competitive threat. “Cisco never had customers trying to compete with them, yet if you bought that company in early 2000, it took you 18 years to break even. That’s the danger of overpaying for good businesses,” he warns.
It's not just Nvidia under scrutiny. Disruption Banking’s December analysis of Palantir highlighted similar concerns. Palantir's stock price had surged by over 70% at the year’s start, raising fears of a potential bubble. As Acutel wrote, “after such a spectacular winning streak, investors may still be wondering whether there’s any value left in the stock as we head into 2024.”
Over in Silicon Valley, companies are racing to capitalize on the AI gold rush. Nvidia partner Lambda Labs is seeking $800 million to rent out servers powered by Nvidia chips, further underscoring the demand in AI computing. Similarly, venture capital giant Andreessen Horowitz has raised a staggering $7.2 billion, sharply aimed at AI startups.
However, investors should proceed with caution. The AI industry is susceptible to increased regulation in Western markets, presenting significant risks. Retail investors, drawn by the promise of AI, should be aware of the pitfalls. Massive stock price increases often provide an opportunity for long-term investors to take profits, but for new investors, the risk of overvaluation is high.
While companies like World Labs and their pioneering work in spatial intelligence are undoubtedly exciting, the hype surrounding AI stocks could lead to overinflated valuations. Prospective investors must weigh the potential for significant short-term gains against the longer-term reality of market competition and regulation. Ultimately, those dabbling in AI investments should do so with a careful, well-researched approach, mindful of the industry's volatility.
