Artificial Intelligence (AI) is expected to revolutionize the technology sector, and big tech companies are vying for investment. However, the recent decline in the market value of AI companies has led to talk of an 'AI bubble burst'. There are even concerns that it could lead to economic instability.

There was a fear that a ‘bubble’ could burst at any time as the AI ​​investment was carried out with great enthusiasm. Along with the discussion of the ‘AI bubble burst’, various analyses are being conducted on its impact on the technology sector. 

Meanwhile, a comment by Sundar Pichai, the head of Google’s parent company Alphabet, on Tuesday has intensified the discussion of the ‘AI bubble burst’. He said that if the ‘AI bubble bursts’, all companies in the world, including Google, will be affected. In an exclusive interview with BBC News, he expressed that although the investment in AI is ‘unprecedented’, there is some ‘unnecessary frenzy’ in it.

Pichai’s statement is seen as meaningful at a time when discussions about a possible AI bubble burst are starting in the technology sector. “No company, including us, will be immune to the impact,” he said, “but Google has the ability to weather that potential storm.”

What is an ‘AI bubble burst’?

After OpenAI launched ChatGPT in November 2022, there was a flood of investment around the world with the belief that AI would revolutionize the technology sector. In 2024 alone, Amazon invested about $4 billion in Anthropic, Microsoft invested $6.6 billion in OpenAI, and Nvidia and Microsoft invested $6 billion in Elon Musk’s XAI.

It is understood that the US invested about $101.1 billion in AI, China $9.3 billion, and Europe $12.8 billion. This also increased the market valuation of companies dramatically. However, such overvaluation is not based on their actual income, profits, and sustainable business success, but rather on the fact that they are like bubbles that look beautiful on the outside but are hollow on the inside, and are likely to burst at any time. 

According to Bloomberg Intelligence, the market value of AI-related companies has added about $17.5 trillion (about Rs. 18 trillion) since 2022. The share price of chip manufacturer Nvidia had increased 13 times since the beginning of 2023. The share prices of Microsoft and Alphabet also increased by 2.1 times and 3.2 times, respectively.

Companies like Meta have announced plans to spend more than $70 billion on AI infrastructure by 2025. Nvidia, considered the main pillar of the AI ​​boom, became the first company to surpass a market valuation of about $500 billion. Now, investors are worried as cracks in this enthusiasm begin to appear.

Recent developments and signs have led to a growing number of news and analyses pointing to the AI ​​bubble, a market that has become too big due to artificial growth, that could burst at any time. Now, from the US to Europe to India, there has been increased discussion about the investment in AI and the skyrocketing market value in the past year.

‘AI bubble’ refers to a situation when the valuation of AI-related companies is based on hype, over-optimism, and the idea of ​​unlimited expansion in the future, rather than on fundamental factors such as profits, revenue growth, or real demand. However, if the results are different than expected, it is considered to have burst or burst. 

Looking at history, many have compared the current situation to the ‘dot-com bubble’ of the 2000s. At that time, the prices of Internet-focused companies were driven by promises and rumors rather than profits, and when it finally collapsed suddenly, a market worth more than 500 trillion US dollars collapsed. It had a long-term impact on the global economy. Some believe that a similar accident could happen in AI. This has led to talk of an ‘AI bubble burst’, i.e. a large drop in the market value of AI companies. 

The share prices of technology and AI companies have been falling steadily in recent weeks. Last Thursday, investors in US technology company stocks lost about $1.5 trillion in a single day. Major indexes dominated by technology companies suffered their deepest declines in months, down nearly 3 percent. The Nasdaq Composite fell 2.3 percent, while the S&P 500 lost 1.7 percent. Asian markets were also affected. Japan’s Nikkei 225 and South Korea’s Kospi also fell 1.7 and 2.2 percent, respectively.

This week, technology company share prices have been volatile. The prices of tech companies that rose steadily last year and reached record highs are now falling steadily, reminiscent of the dot-com bubble burst of 2000. In the 1990s, there was a wave of ‘dot-com’ companies.

Investors were also more excited about the development and potential of the Internet. Therefore, they invested heavily in dot-com companies. In March 2000, the Nasdaq Composite Index reached 5,048 points, double the previous year, according to the ‘AI Bubble vs. Dot-com Bubble’ report published by Intuition Labs.

In early 2000, investment capital became more expensive after the US Federal Reserve announced an interest rate hike. Then, questions began to be raised about the overvaluation of dot-com companies. As doubts arose about the financial condition and profit potential of dot-com companies, there was a mood of trying to escape by selling shares.

The report, ‘AI Bull vs. Dot-com Bull’, states that the Nasdaq index fell from 5,048 to 1,139 between March 2000 and October 2002. This is also considered the first Internet bubble burst. At that time, the market value of some companies fell by more than 80 percent. Investors are estimated to have lost about $500 billion. 

Concerns and warnings

According to the Financial Times, Goldman Sachs analysts Dominic Wilson and Vicki Chang have warned in a message to their clients that excessive investment in AI is increasing the risk of ‘repeating the imbalances of the 1990s’. Investor Michael Burry, who gained fame by predicting the 2008 financial crisis, has announced that he will close his hedge fund, citing the possibility of an AI bubble burst.

He said, “From a security perspective, my valuation doesn’t match the current market.” He has also bet that shares of major AI companies such as Palantir, the maker of AI infrastructure used by US government agencies, and AI chip maker Nvidia will fall significantly. JPMorgan Chase CEO Jamie Dimon and other bank heads have also warned that the market could see serious changes in the next two years.

Now, many content creators, technology analysts and market experts are also starting to strongly suspect that companies tagged with AI are about to repeat their grand success stories. They are warning that the current wave is too high and that it does not look realistic in terms of income-expenditure balance and potential.

For example, even the famous billionaire Bill Gates has said that when assessing the current situation, he is reminded of the dot-com era and responded that “prices are too high and some of these companies will eventually sink.” In the past few months, the Gates-affiliated foundation has sold shares in 17 million AI companies worth nearly $9 billion. This could also be seen as a sign that something is about to happen in the AI ​​market. 

A graphic presented by Bloomberg has become popular in the AI ​​industry commentary. It shows how AI companies have helped each other increase their market value by producing and supplying services to each other. Bloomberg concludes that the risk of breaking a weak link increases the risk of the entire chain being affected, and that inflated valuations, confusing business models, and reckless spending could lead to a major disaster. 

The main problem is that the actual use or adoption of AI at the corporate level is slow, costs continue to rise and profits do not come at the same rate. Karl-Benedict Frey, a professor at the University of Oxford in the UK, told DW that there has been a lot of investment in AI infrastructure, but many US surveys show that the use of AI tools has actually fallen since the summer. He said that the bubble could burst if new and strong areas of use do not emerge soon.

Stuart Mills, a senior fellow at the London School of Economics, also spoke to DW about the gap between the investment in AI and the revenue it is generating. OpenAI, which spent between $8 billion and $9 billion last year, generated just $3.7 billion in revenue.

The Information reports that the company, which makes ChatGPT, is expected to spend $129 billion by 2029. Julian Garan, a partner at the UK-based Macro Strategy Partnership, called the investment in AI a “massive waste of capital” and that it has surpassed previous booms. He estimates the amount of abuse is four times larger than the housing bubble before the 2008 financial crisis and 17 times larger than the dot-com bubble.