The Future of AI: Will the Boom Last or Face a Bust?

How long will the strong artificial intelligence buildout last? The market appears optimistic, with AI chip leader Nvidia (NASDAQ: NVDA) trading at 34 times forward earnings estimates and challenger Advanced Micro Devices (NASDAQ: AMD) trading at 30 times.

However, there is a considerable debate among investors as to whether this hypergrowth is sustainable or if the AI boom will pop like the dot-com bust.

Debate Rages: AI Bulls vs. Bears

AI stocks experienced a significant pullback over the summer following an impressive 18 months of strong performance. Skepticism crept in after the Magnificent Seven, the main buyers of AI chips, released good but not exceptional earnings in July. Investors worried that these large chip buyers weren’t seeing sufficient returns on their investments in Nvidia chips. As a result, many big tech stocks and AI chip plays declined.

Adding to the skepticism, Elliott Management, a major hedge fund, expressed its bearish outlook on potential AI overstretch. In its latest letter to investors, Elliott cautioned that AI stocks were overhyped, arguing that AI applications may not be cost-effective and could lead to inefficiencies. The firm stated that AI technology is only useful for limited tasks, such as summarizing reports and assisting with computer coding.

This perspective is worth considering, particularly concerning current models. Yet, there is a strong belief within the tech industry about the benefits of AI. The substantial investments made by major technology firms suggest that they expect significant advancements in AI are forthcoming.

In a contrasting viewpoint, Oracle Chairman Larry Ellison downplayed these concerns. He proclaimed that the race for AI supremacy will continue indefinitely, as companies aim to develop increasingly sophisticated neural networks. Ellison is confident that companies are committed to expanding AI capabilities, suggesting that the current AI buildout could last for five to ten more years.

Image source: Getty Images.

Big News from Nvidia and AMD

This week featured important announcements from the leading AI chip companies that should ease worries about the longevity of the AI trend. At the beginning of the month, Nvidia’s CEO Jensen Huang reported “insane” demand for its next-generation chip, Blackwell. Last week, analysts at Morgan Stanley revealed that Blackwell is already sold out for the next 12 months, after a meeting with Nvidia executives.

On Thursday, AMD held its “Advancing AI” event, where it introduced its new EPYC 9005 CPUs and Instinct MI325X GPUs. CEO Lisa Su revised her forecast for the AI accelerator market, projecting growth from $45 billion in 2023 to an impressive $500 billion by 2028. She attributed this positive outlook to growing demand and broader adoption of AI applications.

If Su’s and Huang’s estimates prove accurate, the benefits will extend beyond Nvidia and AMD. Companies in related sectors like foundry, semiconductor equipment, and AI-integrated software could also experience growth. Additionally, energy providers will likely benefit as AI data centers require substantial electricity.

Is an AI Bubble on the Horizon?

Reflecting on the past, the dot-com bubble burst in 2000 followed a five-year boom, largely sparked by interest rate cuts by the Federal Reserve from 1995 to 1998. In today’s scenario, the AI boom is only about two years old, and the Fed just began a rate-cutting cycle in September.

This investor suggests we might be in the “mid-90s” phase of growth rather than on the brink of a major bubble burst. The current AI companies are in a much stronger financial position compared to the startups of the late 1990s. Notably, the Magnificent Seven do not exhibit the inflated valuations common among tech stocks during the early internet era.

That said, the potential for an AI bubble remains. While it seems too early for a significant correction, external shocks could change the landscape quickly.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Oracle. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.