Investors are experiencing a surge of enthusiasm over OpenAI’s recent expansion, which has resulted in significant gains for technology stocks. However, a growing number of Wall Street professionals are voicing concerns that the rapid price spikes, which can add tens of billions in market value within minutes, echo the unsustainable market trends seen during the dot-com bubble.
On Monday, shares of Advanced Micro Devices Inc. (AMD) skyrocketed, elevating the company’s market capitalization by nearly $100 billion at one point during trading. This surge followed a lucrative deal with OpenAI that could potentially generate billions in revenue for AMD. On the heels of this, AMD’s shares continued to climb, rising by as much as 7.5% at the start of Tuesday trading. This pattern mirrors that of Oracle Corp., whose shares jumped 36% last month, adding $255 billion to its market valuation after the company announced robust guidance for its cloud segment, which included a substantial agreement with OpenAI valued at $300 billion over five years.
Concerns surrounding these explosive moves were highlighted by Brian Mulberry, a client portfolio manager at Zacks Investment Management, which manages around $12 billion in assets. “If any one of these deals falls through, it has a domino effect downstream that I think is concerning,” he noted, drawing parallels to the telecom industry in the mid-1990s.
These developments come as industry experts worry about the formation of a potential bubble within the artificial intelligence sector. Major players like Nvidia Corp. and OpenAI are committing substantial investments in partnerships with various companies, propelling growth in AI infrastructure. Yet, there’s a growing fear that these escalations could precipitate a crash similar to the one experienced in the late 1990s when excessive investments were made in the anticipation of internet traffic that failed to materialize as quickly as expected.
Today, a potential unwinding of such a market could be more severe. Top technology stocks now comprise around 35% of the S&P 500 Index, compared to just 15% in 1999. Michael O’Rourke, chief market strategist at Jonestrading, indicated that the market is currently pricing these deals as though all transactions with OpenAI will yield positive outcomes. He noted that OpenAI, operating with negative cash flow, has little at stake by entering into these partnerships, suggesting that investors ought to exercise greater caution. Yet, the prevailing sentiment appears to be one of “buy first, ask questions later.”
Hedge fund mogul Paul Tudor Jones conveyed a similar sentiment during an interview, suggesting that the current market conditions bear resemblance to the dot-com bubble. “All the ingredients are in place for some kind of a blow-off,” he stated, warning that history often repeats itself and hinting at the potential for a repeat of such market phenomena.
Further concerns are raised regarding the intricate capital structures of these deals, especially as companies utilize each other’s funds to purchase products from one another. Mulberry added that the scale of stock market fluctuations among such large corporations is particularly alarming, stating, “This is unusual and does call for a moment of reflection.”
Despite these red flags, AMD’s surge may be justifiable, given the significance of its agreement with OpenAI, which enhances its competitive footing in the graphics processing unit (GPU) market against Nvidia. Analysts predominantly viewed the news positively, with Benchmark analyst Cody Acree adjusting his price target for AMD from $210 to $270, citing the deal as a transformative factor for AMD’s market positioning.
Nevertheless, the rapid double-digit increases in multiple tech stocks might signify that valuations are becoming detached from fundamental company performance, driven largely by a fear of missing out on potential gains. Robert W. Baird & Co.’s technology strategist Ted Mortonson remarked that the price discovery process is “pretty scary,” labeling it part of an “exuberance bundle.” He expressed concern that for a company of Oracle’s size to gain so much market value so quickly is neither normal nor healthy.
