The AI boom is a “bubble” driven by the “momentum” of soaring stocks like Nvidia, fund manager Bill Smead has said.
“Dogs chase cars, and people chase stocks,” Smead Capital Management’s founder and chief investor told Business Insider in an interview.
Nvidia shares have surged 12-fold since the start of 2023, supercharging the AI chipmaker’s market value to an unprecedented $4.4 trillion.
Palantir shares have soared 28-fold over the same period, valuing the maker of AI-powered data-analysis software at around $420 billion.
“We’re in the crazy stage,” Smead said, giving the example of CoreWeave, which generated $1.2 billion of revenue last quarter but has a $60 billion market value. The AI cloud-computing company reported a $30 billion revenue backlog at the end of June, underpinned by an expanded agreement with key customer OpenAI.
“It is late ’99,” Smead said, referring to the period just before the dot-com bubble peaked in March 2000.
“This is, from a fundamental standpoint, identical to all the past major manias,” Smead said. “We’re bumping up against history real hard now.”
Smead said the problem isn’t whether AI companies realize the technology’s potential benefits, but that “whatever success they might have has already been massively overcapitalized.”
He said that “when this thing breaks,” people will only be willing to buy AI stocks at a fraction of their current price.
Oracle stock jumped 40% in a day earlier this month after it forecast rapid revenue growth in its cloud infrastructure business, which caters to AI companies such as OpenAI.
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But if it can rise so much in a day, then it can fall 40% in a day too, Smead said.
“That is going to be spooky,” he said, adding that there were declines of that scale after the dot-com bubble burst at the turn of the millennium.
The value investor, who has 40-plus years of experience, said he was worried about the “incredibly unusual,” close incestuous relationship between major AI companies. Nvidia recently agreed to invest up to $100 billion into OpenAI to help the ChatGPT maker finance its buildout of AI data centers powered by Nvidia chips.
Smead said he’s “extremely concerned” that so many people have so much of their savings in the Big Tech stocks, because if they come crashing down, the financial fallout could be enormous.
“I’m watching people build $10, $20 million homes in my neighborhood in Paradise Valley, Arizona,” Smead said. “If the market turns sour, and the tech stocks are crushed, that high-end homebuilding will stop.”
However, he said investors shouldn’t cash out of stocks entirely and wait for a crash as “you can’t hold your breath until then.”
Smead said his fund has mostly avoided tech stocks in favor of energy, homebuilding, healthcare, retail, and real estate investment trusts or REITs.
“We own a lot of meritorious companies in a lot of out-of-favor sectors,” he said.
