The fear that artificial intelligence will not live up to the enormous expectations that venture capital funds have placed in it is growing. More and more voices are warning that this technology could take much longer than expected to generate profits, which is triggering market volatility. The fear lies in the possibility that any new failure or setback of the multinationals that are developing it will generate a massive flight of investors and burst a bubble similar to that of the dotcoms.
The latest to warn that AI won’t be the overnight success many expected were JPMorgan’s asset management division and BlackRock’s market analysis unit. “We’ve seen a disconnect between the short-term vision of some investors and the long-term vision of technology and cloud service providers,” warned Jean Boivin, a director at the latter. “Patience is needed in the development of AI,” he insists, noting that “it will take years, not quarters” to start seeing returns on the investments that technology companies are making today.
JPMorgan is associating it with a “COVIDIA” epidemic, whose patient zero is Nvidia. The semiconductor manufacturer has multiplied its stock market value by 900% in the last two years, thanks to its great competitive advantage in the field of advanced AI chips, of which it is almost the sole supplier. Even if its profits are also increasing enormously – they have multiplied by five compared to the previous year, according to the accounts for the last quarter presented last week – this does not seem to be enough to meet the expectations of the markets.
This lack of coordination between expectations and results is already being felt. Nvidia fell 9.5% on Tuesday on Wall Street, equivalent to a loss of value of around 250 billion euros, the largest in the history of a US company. Other companies in the sector followed. Intel lost 8.8% and Taiwan Semiconductor Manufacturing Company (TSMC) lost 7%. This series of crashes dragged down the Nasdaq and Nikkei and raised fears of an international contagion like the one in early August, but it was ultimately contained on European stock exchanges. This comes after Nvidia announced a record profit of $16.599 million in the second quarter, but warned of a disappointing outlook for the third quarter of 2024.
Expectations soar
Overall, “the COVID-19 forecast is not so much about Nvidia’s finances as it is about the potential for AI transformation that markets are anticipating,” warns JPMorgan. “Nvidia is not a dotcom market leader,” since “its operating margins are high and growing,” they point out. Oddly enough, patient zero is the one least at risk in this situation. It is the other companies in the sector that could be infected by this AI panic, with less robust companies, that worry the asset management department of the largest investment bank in the United States.
According to its report data, 40% of startups that reached the unicorn stage (exceeding a valuation of $1 billion) in 2024 are directly related to the AI business. “More than 60% of the increase in valuations was supported by private equity,” the bank points out.
The rest of the investments have been very much determined by the technological investments themselves. This is another warning issued by JP Morgan, which considers that investments in AI will not provide the expected returns if the technology sector fails to attract capital from outside the industry. Among the paradigmatic cases are the disbursements made by Microsoft in OpenAI or the financing of Anthropic (its maximum competitor) by Amazon.
OpenAI itself is preparing a new funding round in which, once again, the largest investors will be Microsoft and Nvidia, according to media outlets such as the Financial Times and the Wall Street Journal. The round will bring the company’s valuation above $100 billion (it currently stands at around $86,000) despite the fact that it is going through one of its most complicated moments, given its difficulties in developing a sustainable business model and its constant need for capital to maintain its operations.
The majority opinion of specialists, even those who maintain that there is a financial bubble around this technology, is that generative artificial intelligence is here to stay. The question is whether the players who are currently moving the market will be the ones who manage to impose themselves or whether exaggerated expectations will push them forward. “AI as such is going to have a capital importance and a direct impact on the labor market. The question is whether you buy it excessively expensive and how each model can be applied,” explained Borja Rivero, professor at EAE Business School, in a conversation with this media.
“There’s a big question about the ROI on all this spending. And if you go back to the dotcom era, the early winners of the internet weren’t always the final winners,” agrees Paul Nolte, a market strategist at Murphy & Sylvest Wealth Management, told Bloomberg. “Beyond big tech companies buying each other, we haven’t seen AI permeate the broader economy,” he says.
This situation has also penalized Google and Microsoft, the two multinationals most advanced in the deployment of AI in their own products already on the market. The first has already lost 12.5% of its stock market value in July after indicating that these large deployments had had practically no impact on its revenues, even if it recovered after the stock market rebound in August.
In this context, the key question facing AI companies may not be whether they can demonstrate that it is a transformative technology, but whether they can convince venture capital not to pull its investments until they have successfully addressed the current challenges.
