The AI Bubble Is On The Verge Of Bursting

It may have already begun to pop.

Photo by Richard Horvath on Unsplash

The AI bubble is no longer the elephant in the room. It is a demented knife-wielding clown. You can’t ignore it, and if you try to, it will be at your peril. The big question has not been if the bubble bursts and the clown attacks, but when. You see, this bubble is now so enormous and so interconnected with our economy and financial systems (read more here) that when it bursts, it will damage everything. So, predicting when this clown will go on its murderous rampage is critical. The trouble is, it is also impossible to make these kinds of predictions. However, over the past week, there have been significant signs that this bubble is already beginning to pop. We may not have to predict anything, because it looks like the collapse has already started.

Meta

Zuckerberg is playing catch-up. Facebook as a platform is at best stagnant and at worst a failing social media site propped up by boomers and AI bots. But, being the capitalist he is, Zuckerberg wants growth! So, for the past few years, he has been jumping on whatever trend might help the company grow, from launching his own digital metaverses to trying to launch his own cryptocurrency to smart glasses and now AI. But to even think about playing with the big boys, Zuckerberg has to sink a ton of money into AI development, and that is the problem.

During the company’s last earnings call, Meta announced that its annual AI spend will be $70 billion to $72 billion, up from its previous estimate of $66 billion to $72 billion. Now, that is only a roughly 3% increase (taking the average of both estimates) and still within their initial budget, so you’d think investors would be happy. They weren’t.

The very next day, Meta’s share price slid a massive 11%! When asked, multiple institutional investors pointed to the fact that Meta’s investment in AI was ballooning, but they wouldn’t show how it would ever generate a return. Brian Mulberry of Zacks Investment Management even said that “They have to start doing a better job of showing us when that comes back to the balance sheet.”

Why does this matter? Well, it shows that investor sentiment on AI, at least outside of the circular financing, has pivoted. They no longer want to dump money into an AI race and value companies purely based on their AI capex. They want to know how AI will generate a return and are pulling out if that question can’t be answered. This change of stance from investors is one of the many factors that popped previous bubbles, such as the dot-com bubble.

But what caused this switch? Well, just as with the dot-com bubble, the economy isn’t doing so well right now, which means investors are growing more cautious and placing more emphasis on fundamentals than speculation.

Is this a problem? Oh yes. No generative AI company, or generative AI division, is profitable. They all run at gargantuan losses. These LLMs are extremely expensive to build, develop and run. For example, OpenAI loses a ton of money for every one of its top $200 per month users (read more here). There was even a leaked memo that suggested they would need to charge more, like $2,000 per month, to break even (read more here). And, for many reasons, as AI expenditure increases, these models become even less profitable (read more here). So, Meta and every other generative AI driver can’t tell investors how this will ever generate a return, because it never will. That is why this investor stance switch and Meta’s faltering share price are a major sign that the bubble is about to pop.

Despite this clear sign of investor dissatisfaction, Meta is pushing ahead with plans to increase its AI capex to $600 billion by 2028. This is supposed to enable them to compete with the likes of OpenAI. However, considering Meta only has about $44.5 billion in liquid assets on hand, $62 billion in profits each year and no circular financing buddies, they will have to saddle up hundreds of billions of dollars of debt to reach this goal. This announcement sent Meta stock plummeting another 10%, demonstrating that investors are beginning to pull back from AI hype and speculation.

Circular Fall Off

Meta proves that much of the current AI racket comes from the circular financing that has been going on between OpenAI, Corewave, Nvidia, Microsoft, AMD and Oracle. Basically, these companies have been passing around the same bundle of cash to each other in a circlejerk, buying smaller and smaller pieces of each other each time. No functional growth has happened, but on paper, these companies have been able to substantially increase their value (read more here).

However, even this circular bullshit has reached its limits.

Last week, Nvidia lost a gargantuan $350 billion in market value, equivalent to a 10% drop. Microsoft, AMD and Oracle experienced similar slides. At the same time, Meta underwent its 10% slide, and Palantir dropped by 9%. In other words, companies inside the AI circular financing bubble dropped as much as AI companies outside this circle, and at the same time.

I will explain why I don’t believe this is a momentary blip or statistical variation in a minute. But this is huge. It shows that this circular financing hasn’t removed the circular AI players from the broader economy or market forces. In other words, this investor stance switch will likely apply to them as much as companies like Meta, which is a huge problem, as OpenAI and data centre operator Corewave are light years away from profitability (read more here for OpenAI and here for data centre profitability) and have no viable route towards it.

In other words, this shows the broader forces that could pop Meta’s AI bubble will pop this circular bubble too.

Softbank

So, why don’t I believe this is a momentary blip? Why am I reading so much into a 10% drop in stock prices?