Fad or future: Tracking AI’s boom

NEW DELHI: Some of the world’s biggest tech firms have soared in value over the last year. As AI evolves at a pace, there are hopes that it will improve lives in ways that people could never have imagined a decade ago – in sectors as diverse as healthcare, employment and scientific discovery. OpenAI is now worth $500 billion, compared with $157 billion last October. Another firm, Anthropic, has almost trebled its valuation. But the Bank of England has now warned of a possible rapid “correction” due to its concerns about these staggering valuation rises.

The question is whether these values are realistic. Put simply, is AI’s value today a product of what AI will do in future or what people hope it may do? Ultimately, we will only really know if it’s a bubble if it bursts – though the warning signs are evident today.

With hindsight, many things that happen in a bubble may sound exceedingly optimistic. If you take many headlines and replace the word AI with the word computers, it often sounds a lot more naive.

But predicting the path of technological change is hard. Back in 2000 the Daily Mail declared the internet could be a passing fad. Just a few months earlier, the dotcom boom had peaked.

A burst bubble may not change the end of the journey. The internet was not a passing fad. However, bubbles are extremely disruptive and affect people in very real ways. Stocks fall, pensions suffer, unemployment rises, and investment is wasted. Real potential is crowded out in the hype and mania to focus all investment in a small number of stocks and firms.

Right now, we have the first sign of a bubble – a rapid rise in valuations. If these valuations continue to rise, we could be seeing a new, sustained market that is focused on the technology of the future.

Consider a situation where people believe – as the Bank of England does – that AI firms’ valuations may be “stretched”. It’s helpful to consider what these valuations are based on. Investment is simply a bet that AI increases profitability for the firms involved. These massive valuations are bets that AI will hugely increase future profitability.

In some cases, these are bets that AI will improve in capabilities towards some kind of “artificial superintelligence” that can do everything a human can do – or more.

Leading computer scientist Stuart Russell estimates the value of that at $14 quadrillion – investors are buying a claim on that outcome too.

If investors begin to fear that AI profits won’t materialise, then they will try to get their money back. This realisation can appear quite suddenly and can be prompted by seemingly minor events. It doesn’t require a big needle to pop a bubble.

A US article published in March 2000 warned that internet companies were fast running out of money. This caused many people to rethink their investments.

At this stage of the bubble, investment excitement had spread to everyday investors. These regular people balanced their fear of missing out with a fear that they were investing in something new that they didn’t know much about. For many, an article in a popular magazine suggesting they may have made a mistake tipped the scales towards caution. They began to sell their dotcom stocks.

In search of profit

It may come as a surprise to some that, despite its increasing valuations, OpenAI does not yet make a profit. It may require ten times more revenue to do so.

A $500 billion valuation is quite something for a company that reportedly lost US$7.8 billion in the first half of this year. Some of this value appears to flow from a new deal between OpenAI and Nvidia, where Nvidia will invest in OpenAI and OpenAI will buy Nvidia chips. This circular financing keeps everything afloat for now, but at some point, investors will need to see returns.

AI firms more generally do not appear to be profitable at the moment. Investors are not putting their money into today’s losses – they are betting on an AI future.