Concerns are mounting in the financial world regarding the sustainability of the ongoing AI boom, drawing parallels to the previous metaverse hype that ultimately fizzled out. BCA Research has highlighted a potential warning sign for investors, emphasizing that the arrival of a “metaverse moment” in AI could signal trouble for tech stocks, which have seen extraordinary gains as billions are funneled into AI investments.
Peter Berezin, BCA Research’s chief global strategist, indicated in a recent client note that investors should closely watch for any significant announcements from major AI companies regarding capital expenditures (capex) that lead to declines in their stock prices. He warned, “If that were to happen, it would be time to run for the hills.” Until such a moment arises, Berezin suggested maintaining a slightly below-benchmark allocation to stocks over a 12-month period.
The previous metaverse wave captured the attention of investors, who poured in billions, only to see a decline in interest and subsequent losses for companies like Meta. This historical context raises concerns that the current enthusiasm surrounding AI could follow a similar trajectory. Heavyweights like Amazon, Meta, Microsoft, and Google are projected to collectively spend upwards of $320 billion on AI infrastructure this year alone, a figure derived from a thorough analysis of financial statements by Business Insider.
However, warning signs are becoming increasingly apparent. Berezin noted a concerning trend: the free cash flow of these “hyperscalers,” tech companies heavily investing in AI, has fallen in recent months. This is strikingly similar to trends observed in telecom stocks prior to the dot-com bubble bursting. The decline in free cash flow could indicate weakened balance sheets at these firms, raising questions about their financial robustness.
Moreover, speculative stocks that have thrived on AI-driven optimism have recently experienced significant sell-offs. This includes issues in sectors like quantum computing, rare earth materials, and nuclear energy, which further stokes apprehension about the longevity of the AI trade’s momentum.
Amid these developments, discussions surrounding a potential stock market bubble have gained traction on Wall Street. Investors are reassessing the extraordinary AI-driven gains witnessed in recent years. For instance, the tech-heavy Nasdaq 100 has soared 135% over the past five years, while the Roundhill Magnificent Seven ETF, which tracks prominent companies in the AI sector, has surged an impressive 172% since its launch.
As the landscape evolves, investors are urged to remain vigilant, weighing both the allure of the AI boom against the historical lessons stemming from past tech frenzies.
