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Has the AI bubble survived?

US tech stocks, especially those associated with artifical intelligence, took a hammering last week in the wake of the US mid-term elections.

Leading semiconductor companies such as Micron and NVIDIA were hit hardest, suffering a 22 percent and 9 percent fall respectively.

Monday saw something of a small rebound for Micron but NVIDIA were down another 5 percent as the result of concerns over an affair between Jensen Huang and a Chinese spy.

So where to from here?

Clearly AI companies have been shaken by the downturn but things have now stabilised so does that mean the AI bubble isn't going to burst after all?

Well there are some commentators who claim that what we're seeing is the bubble having already burst. They argue that it's more of a deflation than a bursting and that we're now seeing valuations brought more in line with reality.

My take on this however, is that what we've just seen is a ripple that acts as a portent of far worse to come.

AI company Anthropic has announced its intention to launch an IPO this month but already it's having second thoughts after the events of last week totally readjusted the market's appetite for such investments. Its original anticipated valuation of around $2 trillion has been dramatically cut to as little as $1.1 trillion.

What Anthropic does next is almost certainly going to give direction to the markets and could well be the catalyst for a much bigger fall in AI valuations and the pace of investment.

If the company goes ahead with the IPO and it fails to meet expectations we could end up with the company actually being valued at less than the $960 billion struck during a round of private funding back in May. That would strike fear in to the heart of investors.

On the other hand, if the IPO is pulled or postponed then this will be a very bearish indicator to the markets and may well trigger a flight of capital as well as an inability for other AI companies to raise the extra capital they're seeking in order to maintain the pace of their build-outs and their horrendous burn rates.

It is expected that this would have immediate flow-on effects to key component providers such as Samsung, SK Hynix, Micron and NVIDIA. Given the levels of circular funding going on, the ripples could soon become tsuamis, heavily impacting revenues and stock values. If those values start to fall precipitously, investor flight is a very real likelihood.

As has been witnessed in almost every other "bubble burst", once a sell-off reaches a certain point we end up with a fire-sale situation where some investors seek to quit their exposure at almost any price.

That "sssss" of a deflating bubble becomes the ear-piercing "bang" of a bursting one.

Perhaps the savvy investors will recognise that even in the face of a sharp downturn, the silicon makers will still retain significant value. This is because there is a nascent but rapidly growing market for in-house AI systems. All of these will require GPUs and RAM and losses in the datacentre area will at least be partially offset by sales into this local LLM market.

I find it somewhat amusing that both NVIDIA and AMD have openly stated that they are now very much focused on servicing the demand from datacenters. I wonder how long it will be before they backtrack and start focusing on the commercial/consumer market again?

Whatever the outcome one thing is for sure... the next few months will be very interesting.

Carpe Diem folks!

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