Three years have passed since the release of ChatGPT by OpenAI (OPAI.PVT), which ignited enthusiasm for AI. The money is still coming in, but there are also concerns about how long the good times will remain.
Skepticism is growing, as evidenced by the recent decline in Nvidia Corp. (NVDA) shares, Oracle Corp.'s (ORCL) decline following the disclosure of expanding AI spending, and the negative attitude surrounding a network of businesses exposed to OpenAI.
Investors are debating whether to double down to profit from the game-changing technology or limit their exposure to AI before a potential bubble bursts in 2026.
Jim Morrow, CEO of Callodine Capital Management, stated, "We're in the phase of the cycle where the rubber meets the road." "We're kind of anteing up to see whether the returns on investment are going to be good, but it's been a good story."
Concerns regarding the AI industry include its applications, the high development costs, and whether or not customers would pay for the services in the end. The future of the stock market will be significantly impacted by those responses.
The largest tech companies in the world, such as Alphabet Inc. (GOOG, GOOGL) and Microsoft Corp. (MSFT), as well as companies that profit from investing in AI infrastructure, such as chipmakers Nvidia and Broadcom Inc., and electricity providers like Constellation Energy Corp., have all contributed significantly to the S&P 500's three-year, $30 trillion bull run.
The stock indices will follow if they cease to rise. Value Point Capital principal Sameer Bhasin stated, "These stocks don't correct because the growth rate goes down." "When the growth rate stops accelerating further, these stocks correct."
Of all, there are still many reasons to be optimistic. The IT behemoths that make up the majority of AI spending have enormous resources and have promised to continue making large sums of money in the coming years.
Additionally, AI service providers like Alphabet's Google keep advancing with new models. Thus, the controversy. Here are several important patterns to keep an eye on when negotiating these turbulent waters.
In the upcoming years, OpenAI alone intends to invest $1.4 trillion. However, the Sam Altman-led business is making significantly less money than its operating expenses, despite becoming the most valuable startup in the world in October.
According to a September report by The Information, it anticipates burning $115 billion through 2029 before making money in 2030.
So far, the company has had little trouble raising money; earlier this year, it received $40 billion from Softbank Group Corp. and other investors.
Concerns about circular funding in the AI sector are being raised by Nvidia's vow to invest up to $100 billion in September, one of several agreements the chipmaker has made that transfer money to its clients.
If investors begin to hesitate to provide additional funding, OpenAI may face difficulties. And the companies in its orbit, such as computing services provider CoreWeave Inc., will suffer greatly as a result.
According to Eric Clark, portfolio manager at the Rational Dynamic Brands Fund, "if you think about how much money it's in the trillions now is crammed into a small group of themes and names, when the first hint of that theme even having short-term issues or just valuations get so stretched they can't possibly continue to grow like that, they're all leaving at once."
Many other businesses rely on outside funding to pursue their AI goals. Oracle's stock skyrocketed as it accumulated reservations for cloud computing services.
However, constructing such data centers will need enormous sums of money, which the company has raised by selling bonds worth tens of billions of dollars.
Using debt puts pressure on a business because, in contrast to equity investors, who primarily profit when share prices rise, bondholders must be paid in cash on a timetable.
Oracle revealed much greater capital expenditures than anticipated in its fiscal second quarter, and cloud sales growth fell short of the average analyst projection, which caused the company's shares to plummet on Thursday.
Oracle's stock fell even more on Friday after it was revealed that several of the data center projects it is working on for OpenAI have been postponed. This news also affected other stocks that are vulnerable to AI infrastructure.
A measure of Oracle's credit risk, meanwhile, reached its highest point since 2009. In a statement, an Oracle representative expressed the company's continued confidence in its capacity to fulfill its commitments and pursue its expansion goals.
According to Kim Forrest, chief investment officer of Bokeh Capital Partners, "the credit people are smarter than the equity people, or at least they're worried about the right thing getting their money back."
