“Smells strongly” of the dot-com bubble
Artificial intelligence is a hot potato for investors
By Max Borowski
6/27/2023, 6:33 p.m
Artificial intelligence not only has huge potential for the future. The technology is already being used in many companies. However, the steep rise in many stock prices associated with AI has experts puzzled.
The age of artificial intelligence has already begun. Deceptively real pictures, seemingly emotional poems or scientific texts in perfect form, but with questionable content, cause a stir. The price development of many stocks associated with AI is also sensational, above all the software producer C3 AI, whose stock price has risen by more than 200 percent since the beginning of the year, and the chip manufacturer Nvidia with a price increase of just under 180 percent since the beginning of the year.
It is mainly due to the AI boom that the US technology index Nasdaq has increased by around a third since the beginning of the year. A few weeks ago, an analyst at the bank Société Générale calculated that the gain in the leading US index, the S&P500, of almost seven percent up to this point in time was exclusively due to AI values. Without Nvidia & Co., the leading stock market barometer would have shown a loss of two percent instead. This narrow focus on the part of investors, combined with skyrocketing price increases in some stocks, is ringing alarm bells for some investors. Has an AI bubble formed on the stock market that could burst like the dot-com bubble did at the beginning of the millennium?
Even the founder of OpenAI, the company behind what is probably the most well-known chatbot ChatGPT, which has now been taken over by Microsoft, criticizes the “excessive investor frenzy” in his industry. The timing of the stock hype surrounding AI also makes us skeptical. Because it started exactly with the public hype about ChatGPT at the end of last year. That was “surprising,” said Henrik Muhle, board member of the fund house Gané at ntv. “AI is not a new topic. It has been researched for many years and has also been in use for many years.”
There is no doubt that the potential of the technology is huge for many companies. “AI is there, it’s real, it makes sense,” says Muhle. There will probably soon be hardly any software product that does not use AI. This not only benefits the manufacturers of these programs, such as Microsoft, and the required hardware, such as Nvidia, but also companies that use the technology. According to Muhle, cost reductions of 90 percent, for example in image and video processing, are possible. The investment bank Goldman Sachs estimates that the use of AI could increase global economic output by seven percent within the next ten years. That corresponds to around 7.5 trillion euros, more than Germany’s annual economic output.
Terrible ratings
However, it is highly uncertain which stocks will benefit from these huge productivity gains and to what extent. At current prices, Nvidia is valued at about 25 times the annual earnings that analysts expect about five years from now. For comparison: In the case of shares in DAX companies, the price-earnings ratio is currently 13 on average – based on the actual, current corporate profit. The young software specialist C3 AI, which is currently valued at just under four billion dollars on the stock exchange, is not yet making any profit at all.
In some companies, there is already an increase in the share price if they “even mention the word AI,” quotes Bloomberg James Penny, the investment manager of the asset manager TAM. “It smells very strongly of the dot-com era.” Many companies along the AI value chain, from software and hardware manufacturers to machine builders for chip production and their suppliers, are not valued quite as exorbitantly as Nvidia or C3 AI. But in many cases, the stock price already includes a hefty AI premium. “It’s not that easy to find a stock that hasn’t been inspired by this euphoria,” says Gané boss Muhle.
The experts cannot predict whether this AI euphoria on the stock exchange will be followed by disillusionment and which stocks will be affected. Muhle advises caution “in evaluation phases like now”. With “one or the other value” it is probably best “to wait for cheaper buying opportunities”.