Huge drops in the share price of artificial intelligence powerhouse Nvidia have led to speculation about the prospects for the sector. Nevertheless, analysts see AI firms as healthy given incoming revenues.
In the past five days, shares of Nvidia Corporation have fallen by more than 17%. While that is a major decline that wiped away hundreds of billions of dollars in market value, the company has still notched impressive 120% gains since the start of the year and returned jaw-dropping 2,270% returns over the past five years.
The sell-off has prompted some to wonder whether AI, which has become one of the hottest industries to invest in, is overvalued or even a bubble. The dizzying gains of Nvidia and other tech companies that produce the semiconductor chips needed to power AI harken back to the dot-com bubble a quarter of a century ago, but experts note that there are some key differences.
“In a lot of ways, this couldn’t be more different than the late-90s dot-com boom,” Jamie Cox, managing partner for Harris Financial Group, told the Washington Examiner. “Because unlike then, the companies actually make money. They’re not the thought of a concept of making money, this is actual sales and actual delivery of materials.”
One factor that might be driving Nvidia’s stock down is news that the Justice Department subpoenaed Nvidia as part of an investigation into whether the company is violating antitrust law.
Cox said the Justice Department is looking into whether Nvidia prioritized larger players in the industry over smaller ones.
“And, you know, that’s not a good look either. So I don’t think it has anything to do with AI generally,” he added.
Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, pointed out that bubbles are not easy to detect until after they occur.
“I mean, bubbles are really only kind of apparent with hindsight,” he told the Washington Examiner.
Samana said it is also possible that AI truly is a transformative technology and that people are underinvesting in AI companies.
He also made the point that it would be tricky to compare the current slate of major AI companies to the dot-com bubble because during the dot-com bubble there weren’t much in the way of earnings.
“There was no real business there beyond kind of the promise of the internet, so to speak, and that if a company had a .com in their name, they would kind of double or triple in value,” Samana said.
Many of the businesses involved in the AI industry are also profitable in other areas and on their own accord too. For instance, players like Meta, Google, Microsoft, and Apple all have shown profits and have proven to be good picks on Wall Street in the time before AI.
“I don’t know what AI means for their businesses, but even if, let’s say, AI went away tomorrow … we’re all still going to use I’ll just call it office productivity software. We’re all going to buy smartphones, we’re all going to use social media,” Samara said.
Rodney Lake, vice dean for undergraduate programs at George Washington University and director of the university’s Investment Institute, told the Washington Examiner that the future of companies in AI is difficult to predict.
“I think you could absolutely have companies that are going to be in an overvaluation but not necessarily bubble,” he said. “You’re going to have companies that are going to keep growing, and there could be some companies in this mix that are in bubble territory.”
Lake said it is hard to tell whether Nvidia’s crushing year-to-date returns are sustainable. They could be if the demand for AI chips continues to grow beyond expectations.
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Still, he said, there might be some companies that are just “tagging along” and investors think they are part of the “AI revolution” but aren’t necessarily, and those companies could see their individual bubbles bursting.
“And I don’t think it’s going to be a repeat of what we saw in 2000, I think it’s going to be something different,” Lake said.