Trading Desk
A.I.nflation: Billion-dollar grave or Next Big Thing?
-
Martin Raab
Investment-Stratege
Artificial intelligence has a firm grip on the markets – so firm that even old stock market hands are now wondering whether it is wise to continue being “long”.
Would you like to raise a few million US dollars in venture capital from strangers in a short space of time? Then create an appealing pitch deck with lots of “AI” in the name, rent an office in America or London and use “generative blockbuster technolgy” a few times as the headline. All joking aside, according to the latest industry data, around USD 89 billion in venture capital has flowed into AI start-ups since January of this year. This is a historic record and corresponds to around a quarter of global venture capital. According to the analysis, there are currently over one hundred AI unicorns worldwide, i.e. companies with a valuation of over one billion.
The situation is similar on the stock markets: Nvidia, the symbol of the AI boom, has become a USD 4.9 trillion legend. ETF providers are reporting record inflows into AI themed funds, some of which have seen their volumes grow by more than 100% within a year. At lunchtime in London’s Canary Wharf financial district, you now often hear: “Yes, we just launched an AI-thematic fund, too.”. Investors buy what sounds like the future – not necessarily what looks like sustainable profit.
But what happens when the sound of the future falls silent? Many of the highly acclaimed start-ups are still in the red. Their valuations are based on fantasy rather than free cash flow. A data center that is built and equipped today costs USD 200 million. The AI chips installed there will have to be replaced after three years, as they will then be technically obsolete. This costs a further USD 120 million. This example illustrates that investments in the billions have to be amortized within an extremely short period of time. From a stock market perspective, many chart trends show a pattern that was last observed in the dotcom era.
Stock market psychologists know: Bubbles don’t burst because the underlying idea is wrong, but because too many people have the same idea at the same time. The figures speak for themselves: too much capital, too high valuations, too little actual turnover – not to mention profits. Artificial intelligence may be the future, but its prices have already been imported from the future.
