Investors are increasingly becoming concerned that AI companies may be grossly overvalued — and could struggle to justify their enormous hype by successfully ratcheting up profits.
So it’s naturally alarming that shares of AI industry stalwarts, including Oracle, Nvidia, AMD, and Amazon, fell sharply on Tuesday, following concerns over enormous valuations that have propped up the entire US economy for months now.
AI chipmaker Nvidia’s shares dipped just shy of four percent, while competitor AMD’s slid just under three percent today. Software giant Palantir was hit hardest, dropping over nine percent, despite beating Wall Street expectations with its Q3 earnings.
What all of these companies have in common is an enormous price-to-earnings ratio (P/E), CNBC reports, which measures a firm’s share price relative to its earnings per share. It’s often used to determine whether a company is over- or undervalued.
In the case of Palantir, the company’s valuation is upwards of 200 times its forward earnings, suggesting investors could be starting to ask difficult questions about the firm’s ability to sufficiently boost its revenues.
The sudden dip comes after months of investor euphoria. The S&P 500 index has risen over 20 percent over the last six months alone, only to decline just under two percent over the last five days, indicating growing concerns over AI hype that grew too much, too fast. Companies have been pouring hundreds of billions of dollars into major AI infrastructure buildouts, despite revenues lagging far behind.
“We haven’t really seen any major corrections or any real pressure on stocks since April,” Ameriprise chief market strategist Anthony Saglimbene told CNBC. “Profits are good, but I think investors are starting to ask themselves, based on the pace of [capital expenditure] investments from some of these key Big Tech companies, ‘Are you going to see the profit growth over the next year to justify the levels of capex?’”
Saglimbene argued that he “would fully expect that you’re going to see a little bit of some periods of pullback.”
Goldman Sachs’ David Solomon also raised alarms, predicting a “ten to 20 percent drawdown in equity markets sometime in the next 12 to 24 months.”
Just last week, Meta CEO Mark Zuckerberg announced that the firm would increase its already enormous AI spending significantly this year — news that was met with investor skepticism. The company’s shares slid by more than 11 percent on Thursday and are down over 16 percent over the last five days.
It’s a precarious moment, with experts warning that the AI boom cycle is propping up a weakening economy. The consequences of a sudden collapse could be enormous.
Meanwhile, some are cashing in on the dipping shares. Most notably, investor Michael Burry of “The Big Short” fame disclosed he had placed bets against Palantir and Nvidia this week. Burry famously predicted the US housing market bubble and the following crash in 2008.
Whether he’s right about an impending correction remains to be seen. Palantir CEO Alex Karp, for one, is unsurprisingly skeptical of Burry’s bets.
“The two companies he’s shorting are the ones making all the money, which is super weird,” he told CNBC today. “The idea that chips and ontology is what you want to short is bats*** crazy.”
More on the AI market: Meta Stock Plummets as Investors Horrified at How Much Zuckerberg Is Spending on Misfired AI
