Nvidia, the $1.7 trillion chip giant, is worth just over $100 billion after a blowout quarter, but this deeply pessimistic analyst says the tech industry is in the midst of an AI bubble

Investors have long had a soft spot for U.S. technology stocks, from the boom cycle of the late 1990s and early 2000s that ended with the dot-com crash to the peak of Nvidia’s current stock price rise fueled by artificial intelligence. However, love often ends. Worse, it could be both a pain in the wallet and heartbreak for investors. Artificial intelligence has officially pushed the U.S. tech industry into a bubble, and Silicon Valley may be on the verge of collapse. Another crash,according to Analyst Notes From Dhaval Joshi, chief strategist at BCA Research.

“We’re in an artificial intelligence bubble,” Josh said wealth“We were surprised by some of the results.”

Few stocks embody the wow factor like Nvidia, the $1.7 trillion artificial intelligence chip giant that reported earnings on Wednesday. Exceeded analysts’ expectations The chip maker was called “the most important stock on earth” by one industry insider Goldman Sachs Analysts reported revenue of $22.1 billion last quarter, compared with expectations of $20.6 billion. Revenue from the company’s data center chips used to model artificial intelligence and generate artificial intelligence applications reflected increased demand, reaching $18.4 billion, up 27% from the same period last year. In the third quarter, sales increased 409% compared with the same period last year. Shares rose 7% in after-hours trading, adding more than $100 billion in value.

“Accelerated computing and generative artificial intelligence have reached a tipping point. Demand is surging across companies, industries and countries around the world,” Nvidia founder and CEO Jensen Huang said in a press release.

While Josh didn’t comment specifically on Nvidia, its stellar performance could be seen as evidence of his argument.

The tech sector trades at a 75% premium to global equities, Joshi calculated in an analyst note released last week.Its red-hot growth underpins much of the rest of U.S. stock market growth and Drive Nasdaq Last year was close to all-time highs, just 6.5% below the November 2021 all-time high. By 2023, the so-called “Seven Heroes” composed of Nvidia will apple, Microsoft, letter,Yuan, Amazonand Teslacontributing two-thirds of the S&P 500’s total market gains.

While these gains are impressive and rewarding for savvy investors, they are unsustainable, Joshi said.

Unlike Nvidia, some companies will fail to live up to the lofty expectations set by the market.This can cause trouble because valuation and stock price often measure against expectations Although they are actual results. If major tech companies that contribute much to the industry’s (and economy’s) growth fail to meet analysts’ expectations, they could drag down other companies. Although Josh warns against underestimating the overall level of artificial intelligence, he believes the market is overpriced for the productivity gains brought about by new technologies. When new innovations fail to live up to these expectations, the market punishes the companies that create them.

“With these few stocks accounting for such a large portion of the market capitalization, any disappointment would mathematically have an impact on the overall index,” Joshi said.

For the U.S. tech industry to avoid a bubble, it must continue to trade 10% above the market—a scenario Joshi believes is unlikely to happen.

Josh doesn’t blame the market for valuing technology companies so highly. In fact, they have proven their worth time and time again over the past decade by delivering outstanding results. Shares of top technology companies have soared over the past decade. For example, since February 2014, Nvidia’s stock price is up 14,927%, Microsoft is up 964%, and Apple is up 875%. Those numbers pale in comparison to a stock that’s still going strong. 163% The S&P 500 has recovered over the past decade. While he doesn’t think the situation will last, he said the market remains reasonably priced for explosive growth in the tech sector.

“If you get very strong earnings growth for a year or two, the market looks at it the other way: ‘This is not sustainable.’ So, if anything, you give it a lower valuation, Because you’re saying these are abnormal, Josh said, but if the market sees 10 years of outperformance, it will no longer view these results as abnormal and will always expect them.

For Josh, however, the phenomenal profit growth over the past decade was actually abnormal. Largely because much of that growth is the result of network effects, which allow a handful of companies to scale and profit efficiently. Amazon has taken over online shopping, and Google has taken over search, Josh wrote in his report. Market, Meta monopolizes the online communication market.

“Once you have a network, you’re going to have winners and losers. Those winners become natural monopolies, and if you’re a natural monopoly, you’re in a very good position to increase your profits,” he said.

Joshi believes that without clear signs that network effects will translate into the artificial intelligence world, these companies will not have the same dominance. “The market is saying, ‘Hey, the baton is now going to be passed to generative AI and this trend is going to continue over the next five to 10 years.’ I’m very cynical about this because there are no network effects in generative AI. “

There may be some particularly popular AI tools can see network effects If they attract more users because they will be able to train themselves on all the tasks they are asked to perform.

Even without artificial intelligence, the benefits of network effects appear to be diminishing in the near future as elected officials push to regulate big tech companies. “The Web 2.0 revolution has reached its limits due to consumer backlash and tighter regulation about what data you can collect and how you can use it.”

In Europe, the European Union has passed several landmark legislation aimed at breaking up publicly traded power tech giants such as Apple and Alphabet.And in the United States, despite the absence of a national privacy law, there are unprecedented levels of bipartisanship and public support for a range of initiatives new law That will limit The amount and type of user data technology companies can collect.

But while Josh sees upcoming hurdles for the tech sector, he doesn’t expect the entire industry to collapse like it did when the dot-com bubble burst. In fact, it will continue to outperform the overall market, just at a slower pace. This could still mean huge losses for investors, especially when the market eventually adjusts to a tech sector that no longer offers 100x returns.

To be sure, whether the market is in the midst of an AI bubble remains hotly debated. Josh isn’t the only one who thinks there’s a bubble. Morgan Stanley Warning not to dive headfirst into the field of artificial intelligence, lest investors do not have sufficient foundation before artificial intelligence emerges bubble burstMeanwhile, Goldman Sachs and others see returns surging Not a bubbleJust the market benefit The future of technology.

As for what investors should do to mitigate the risk of a possible AI bubble, Josh has some simple advice: Invest in other areas of the market, such as healthcare and luxury goods.

This story was originally published on wealth network

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