The Fear is Back: Are We in a Bubble?

FUTURE

Is AI in a Huge Bubble?

The topic as to whether AI is in a bubble has no in-between. Either, ‘Yes, it's the biggest bubble ever,’ or ‘No, we are just getting started, this is the best transformational technology in history!’

But as always, the answer is far more nuanced.

Today, we will cover the following topics: Private and public valuations, with some insane numbers like double-digit billion-dollar pre-revenue valuations and a company with a PE of 600 plus, historical patterns (CAPE, comparison to “dot-com” bubble), debt securitization and other financing trends, a concerning trend coming from SV, up-to-date adoption data, a real capex-to-revenue gap exercise you won’t find elsewhere, the $1 trillion dollar bet, and energy constraints, among other data-driven insights, all in one single piece for you to enjoy.

Let’s dive in.

A Story About AI Markets

Before we get into public and private AI investing, for the sake of the piece, let’s first provide a quick definition of a bubble.

According to the International Monetary Fund, a bubble occurs when public and private valuations are based on unsustainable investor behavior instead of fundamentals.

In other words, when the valuations of the companies inside the bubble are based on things like hype, FOMO (Fear of Missing Out), and, importantly, solely on the idea that the company will be worth more in the future, not because it has a strong business or a clear path to monetization, but just because the underlying technology warrants it.

In other words, 'I don’t know if people actually want what this company is building, but it’s an AI company, so it’s valuable.’

Here, the IMF points at investors as the creators of the bubble, so let’s see what investors are doing. Let’s start with the hottest place of them all: private markets.

Private Markets

Back in March, we saw the biggest private round in finance history, when OpenAI closed a $40 billion investment round ($300 billion valuation) led by companies like SoftBank or Thrive Capital. For reference, that round is almost as large as the entire market capitalization of the Ford Company.

$40 billion for a company that, according to its own estimates, won’t be profitable anytime soon, not before 2029, and lost $5 billion just in 2024.

It must be said that OpenAI is ‘res singularis’; it has strong revenue growth, extreme word of mouth, and hundreds of millions of daily active users.

If you’re an investor and you’re going to bet on someone, it’s them.

In fact, its valuation looks quite healthy for a private company. The current run rate, estimated at $13 billion, puts them at a price-to-sales (PS) ratio (the multiple difference between the company’s valuation and its sales) of 30 or less, not shy from NVIDIA’s current price-to-sales.

Metrics like price-to-sales or price-to-earnings (profits) are heavily used by investors to analyze whether a company is expensive or cheap.

But if you still think it’s excessive, well, you’re in for a wild journey today, my dear reader. If…

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