Wall Street is often described as a voting machine in the short term and a weighing machine over the long term. In other words, emotions hold sway over short periods of time while actual business success is what's important in the long run.
Artificial intelligence (AI) is all the rage today, and companies are investing heavily in the technology. That's exciting today, but if history is any guide, it could be what leads to the popping of the AI bubble.
AI will likely change the world
Although I have my misgivings about the technology, I'm not here to disparage artificial intelligence. Without question, what AI has achieved is incredible. And the speed with which advances are being made is rather shocking. Sure, like famous investor Charlie Munger, I don't really know why "regular" intelligence needs to be replaced, but that hasn't stopped the world from embracing AI.
Image source: Getty Images.
The poster child for AI investing is probably Nvidia (NVDA +2.13%), which makes the computer chips that help power the computers used by AI. But this technology is reaching far deeper than you might expect, with even steel maker Nucor (NUE 0.39%) discussing the demand it has created for the metal racks and building components needed to erect all of the new data centers being built to house Nvidia-driven AI systems.
And yet the most shocking example of the power of the words "artificial intelligence" might come from Opendoor (OPEN +2.73%). When its board of directors brought in a new CEO, he made sure to announce that AI would be a key technology used to turn the troubled house flipping business around. The stock skyrocketed.
NASDAQ: OPEN
Key Data Points
We've seen this story before, and it ended in a crash
While Opendoor is an example of irrational exuberance, the current demand for Nvidia's chips and Nucor's data center building components is more notable. When a new technology comes out, companies start investing in the commodities that support that technology. If it turns into a bubble, the spending goes overboard. That seems to be the situation today, with more and more companies leaning into AI in what could be called an arms race. This is good and bad at the same time.
The last good "bubble" that took place in the technology sector was around the internet. Building out the infrastructure needed to support the so-called web, from fiber optic cables to websites, took a huge amount of spending. Companies started to create internet strategies even if they didn't really need one. Eventually, there was more "web" built than was, at the time, needed. A lot of once high-flying companies ended up being worth a lot less than overexuberant investors thought.
The most interesting example is probably Yahoo!, which was once the leading search tool. It ended up being displaced by Google, which is now just one part of the large company known as Alphabet (GOOGL +0.52%) (GOOG +0.39%). Then there's Cisco Systems (CSCO +0.52%). It has been roughly 25 years since the dot.com bubble burst, and this tech giant's stock still hasn't returned to the highs it achieved at the peak of the bubble.
Data by YCharts.
That's the downside that investors should be worried about as the AI bubble inflates. If you are late to the party, you could be left paying a steep price. Even though AI is likely to change the world in important ways, trees still don't grow to the sky. Be careful.
The long-term benefit of overexuberance
What's interesting about the dot.com bubble is that all of the overspending created a situation where the cost of building out the web became drastically cheaper. It was a simple supply/demand dynamic. With too much supply of products like fiber optic cables, costs fell, and over time, demand only slowly took up the slack. The end result was a globally connected world. The same thing could happen with AI.
Right now, companies are building out AI infrastructure with what seems like total abandon. Nobody wants to get left behind in the AI megatrend. That fear of missing out is what is driving the bubble higher. It is what will likely result in too much AI infrastructure being built. That will likely lead to a lot of investors losing money. And it will be the key turning point that helps truly turn AI into a technology that changes the world forever.
