When is the AI Crash Coming?
Will the Valley rise like a phoenix or learn a hard lesson?
Growing up in Silicon Valley, there are a few local parables and stories you are told from an early age. We are taught about bootstrapping through the tale of Hewlett and Packard in a garage, of the dangers of autocracy through Microsoft's battle with government regulatory bodies (sigh…), of Sam Brannan selling the shovels to gold miners, and of morality through Google's "Do No Evil" slogan. Amongst all our parables, however, arguably the most common is our one on hubris, our modern tale of Icarus, the Dot-Com Bubble's Crash in 2000.
For those who haven't heard of this crash, the late '90s saw a boom in online companies as the internet's potential was evident for the first time. This growth led to a point where the market was untenably high, and the following market crash completely destroyed Silicon Valley. If the tech world was to be divided into eras, the Dot-Com Bubble Crash is the thing that splits them. It should be our tale of Icarus, a warning of caution and overly investing in a new technology yet to be proven. The Valley still jumps first at any given moment to try something new. This may have led to Amazon and Apple's iPhone, but this also led to innumerable Theranos or NFT-type false promises. Investors have chosen to hold, believing every technology can have its best products emerge from crashes.
Where artificial intelligence fits into the Valley's chart of failures and successes is still unknown. While the world has had mixed reactions to AI, from full-blown Luddite panics to acting as a quick-and-easy replacement for actual research, the Valley has completely jumped headfirst into it. From Microsoft's strategic partnership with OpenAI to Meta's high investment in the technology and Google's… experiments with Gemini, any tech company you know has tried to invest in AI.
The initial result was a rather fantastic stock market rebound. The market surged like the Salesforce tower over the San Francisco skyline. Companies rose to remarkable highs simply on the fact that their products had strong ties to AI. Most notably, NVIDIA, whose GPUs were used in AI development and usage (a story for another day), rose to become the most valued company in the world for a bit, over 3 trillion dollars (MY. DEAR. GOD.). If the AI bubble ever had a peak, it was a few weeks ago when the bubble seemed unbreakable.
However, the last week has been hard on the stock market. CrowdStrike's crash caused about a billion dollars in losses and was the first to alight investors' fears. This was followed by disappointing earnings reports from Alphabet (despite reaching rather high profits, a story for another time, once again). Finally, selling-offs in the Nikkei market further plummeted the US market. All these incidents (probably more by the time this article is published) saw massive drops in AI stocks in particular, with NVIDIA itself dropping down to being the third largest market cap quite quickly.
This has made investors and the market paranoid about AI. As AI is still new and volatile, every single tremor in the market hurts AI more than anything else. Rumors have swelled: When is the AI crash coming? Is an AI crash coming? Has it already started? And if not, what will cause it? Will AI be able to recover, and if so, what will the long-term damage be?
Let us first get one fact out of the way: AI's rise or fall has nothing to do with its quality or how it is utilized but everything to do with its profitability. One of the main reasons for AI's vulnerability in the market right now is the struggle to profit from AI. Microsoft recently announced they expect their endeavors in AI to turn a profit in fifteen years. Despite all the hype, AI has failed to make a profit in a way that many investors expected. It also doesn't help that the costs to develop and sustain AI are incredibly high. Who can forget Sam Altman seeking $7 trillion for a new AI chip?
The matter of fact is that AI might be the most hyped-up technology in modern history, probably since the Dot-Com bubble itself. Companies such as OpenAI, NVIDIA, and Alphabet have hedged their bets on AI, investing more than most companies and individuals earn in their entire existence just to promote AI on their main products (as anyone who has tried to use the Google search engine over the past few months can attest to). They have promised treasures and earnings more than imaginable and, if we are fully honest, possible.
When these companies started tempering expectations, tremors started shaking throughout the stock market, which was only pushed up due to solid jobs data. Nonetheless, an undercurrent in every investor's mind still exists: What about the AI crash?
Is an AI Crash Coming?
Eventually, I believe AI will face a reckoning, but I don't think that will happen today. The market is good at ignoring things that should worry it as long as possible, and AI should be no different. In my personal opinion, it would take something significant for investors to be a lot more bearish on AI. This may or may not be:
A major tech company announces they will scale back their AI operations.
A prominent AI startup shuts down or declares bankruptcy.
The government places new restrictions on AI data farming.
Mind you, this may still not be the end of AI, but it will be a significant reckoning. It will differentiate the snake oil charlatans and those who have a real product to sell. It also may take down some decent companies with good ideas and no direct plans for revenue for the time being.
In my opinion, the most likely results of such a crash are as follows.
The entire market crashes, somewhat like the Dot-Com crash.
Major tech companies take a beating, but most should survive unscathed in the long term.
Many AI tech startups close down, and we get a brief window where the AI market is democratized, and anyone who actually knows how to make a profit can rise quickly.
The biggest question that I cannot predict yet is NVIDIA. With clever management and a little diversification, I think NVIDIA can survive; whether they do that or not, however, is anyone's guess.
Of course, these are just my opinions of what is the most likely result of the constant growth of the AI market. AI's crash could kill the technology rather than curb the bad apples. Or, the AI crash could never happen, and AI continues to grow. Either way, a clever investor should keep their eyes open on AI for the foreseeable future.