Money Rehab with Nicole Lapin - Are We in an AI Bubble? Here's the Honest Answer

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Starting point is 00:03:51 reasonable percentage of today's AI stocks can't back up their valuations. Jan Vaneck, the CEO of Fund Management from Vanek, is more of an optimist here. He believes that the AI bubble already had a correction in late 20, and now we're entering a more sustainable phase two. Experts, though, are really split, and both sides cannot be right. So let's take a look at what's actually happening. According to UBS, global AI spending is set to reach $500 billion by 2026. Microsoft, Amazon, Meta, and Alphabet, aka the hyperscalers,

Starting point is 00:04:26 are pouring hundreds of billions of dollars into AI infrastructure, and companies like NVIDIA are pulling in record earnings. The concern is that the valuations and investment, behind these companies aren't driven by the financial fundamentals, but actually driven by hype and momentum. And there's reason to be worried about that. Palantir, for example, a data integration and analytics platform is trading at a PE ratio near 400, which is 16 times higher than the average of the S&B 500. Now, a PE ratio measures how much investors are willing to pay for each dollar of a company's earnings. So Palantir investors are willing to pay $400 for every $1 of earnings.

Starting point is 00:05:05 It sounds crazy, but the rationale is that investors are comfortable paying a massive premium today because they believe that the company's future earnings will grow dramatically. But that's a level of optimism that might be hard to deliver on. And that's where investors start to worry about something being overvalued. If a company with a high PE doesn't end up growing fast enough, the stock can fall sharply as expectations reset. For investors, buying into companies that appear overvalued can mean taking on more risk. Not because the business is bad, but because the price already assumes near perfection. And when perfection doesn't show up, valuations tend to come all the way back down to Earth.

Starting point is 00:05:46 These observations are giving some investors dot-com bubble deja vu. The dot-com era was a period in the 90s when internet stocks became way overhyped. The bubble popped, and in October of 2002, the NASDAQ was 77% lower than it was during the dot-com peak in March of 2000. So the big fear, especially for investors who have been around for a while, is that the AI bull run is just dot-com bubble 2.0. And there are definitely some similarities that are hard to ignore. Like sky-high valuations. Just like in the late 1990s, investors are putting massive price tags on companies that aren't yet profitable. OpenAI, the parent company of ChatGBT, for instance, was recently valued at around $750 billion, despite projected losses through the end of the decade.

Starting point is 00:06:33 Open AI is planning on investing $500 billion in data centers over the next few years, but it doesn't expect to turn a profit as a company until 2009. And in 2020, Open AI is only expecting to profit $14 billion. And then there are some funky circular finances. During the dot-com bubble, companies would often book revenue through vendors who are also their investors or customers. We're seeing some of that today in the AI space. For example, Nvidia has made large investments in startup.

Starting point is 00:07:03 like CoreWeave, which in turn buys Nvidia chips, creating a closed loop that inflates perceived demand. Another problem with bubbles is that they're often not as self-contained as they sound. A popping bubble can be the start of something much bigger. The fact that Nvidia was responsible for around a fifth of the SMP 500's gains in 2025 means that if anything goes wrong with Nvidia, the entire stock market is going to feel the pain. If the stock market is overvalued, that's when investors start worrying about crashes. Warren Buffett actually created an indicator for this. He looks at the total stock market valuation divided by GDP.

Starting point is 00:07:42 So basically how big the stock market is compared to the entire economy. Historically, when this ratio goes above 100%, markets are overvalued. The indicator was 150% during the dot-com bubble, and now we are over 200%. But here's what's different. Unlike the dot-com era, many of today's AI leaders are already profitable. So maybe OpenAI is not going to be profitable until 2029, but Nvidia, Microsoft and Alphabet, they are cash flow machines. Invidia's earnings have grown even faster than its stock price, which has risen 1,300% in five years.

Starting point is 00:08:18 And its PE ratio has dropped from over 200 to around 45. This cash flow point is an important one because it means that these companies can fund their own growth without relying solely on taking on debt or investors' money. To be clear, there is definitely debt in AI. Oracle recently borrowed $18 billion to fund its AI infrastructure. That is a massive bet on future returns. If those returns don't materialize, that is a lot of leverage to unwind. So are we in a bubble?

Starting point is 00:08:49 Well, here is the best honest answer. Maybe. Partially. There is a credible argument that some parts of the AI market are in bubble territory, especially unprofitable startups with soaring valuations and uncourcially. clear paths to monetization. And circular financing deals and excessive leverage are definite red flags. But unlike the dot-com bust, where many leading companies had no profits or any real business models, the AI wave is anchored by giants with real revenue, disciplined capital allocation,

Starting point is 00:09:22 and robust balance sheets. Think of it like this. In 1999, the market was betting on the internet changing everything. It was right about that. It just bet wrong on the companies. Cisco, the darling the dot-com era is still worth less today than it was at its peak 25 years ago. But the internet, it did fundamentally change the world. And the same thing could happen with AI. The thesis might be right, even if many current players don't survive. So I like Bill Gates' guidance. Not every AI company is going to be a winner.

Starting point is 00:09:51 So we need to plan and diversify accordingly. For today's tip, you can take straight to the bank. If you want to ride the AI wave without wiping out, don't go all in on the loudest names with the biggest headlines. Instead, look for the enablers, the companies that provide the picks and shovels, so to speak, in this AI gold rush. That might be the semiconductor manufacturers, data center infrastructure plays, or cloud providers with proven revenue streams.

Money Rehab with Nicole Lapin - Are We in an AI Bubble? Here's the Honest Answer

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