Rampant speculation and massive overinvestment in AI is creating an economic threat of cosmic proportions, and the fallout will be catastrophic, Eric Gordon has warned.
“The AI bubble is almost as big as Jupiter,” Gordon, a professor of entrepreneurship at the University of Michigan’s Ross School of Business, said in an email to Business Insider on Wednesday.
“If it ruptures, the pieces will be scattered everywhere,” he continued. “Large institutional investors will also be hurt, as will retail investors who were betting that the bubble would get bigger.”
Gordon noted that Microsoft shares fell more than 6% on Wednesday after the software giant’s earnings beat. Shares were trading down about 12% as of 12:30 p.m. ET Thursday, the steepest intraday decline in the company’s history.
Gordon said Microsoft’s stock has fallen because “trucks of cash are being invested in AI.” “It’s a warning of an upcoming explosion.”
The cloud computing giant used more than $57 billion in net cash for investments in the six months ended December, an increase of 95% from a year earlier. This was fueled by the addition of $49 billion worth of assets, data centers and other facilities.
After a period of poor performance, Microsoft’s stock price has nearly doubled since the beginning of 2023, and the company’s market value has risen to more than $3.5 trillion.
Other AI stocks soared even more during this period. Shares of chipmaker Nvidia have soared 13 times, valuing the company at nearly $4.7 trillion, more than 20 times its estimated sales for the fiscal year that ended Jan. 25.
Palantir’s stock price has soared about 25 times, giving the data analytics company a market value of $375 billion, or about 85 times its expected 2025 revenue.
Gordon told Business Insider in an email last week that he doesn’t expect the AI bubble to burst in the coming months because investors still have enough cash to “prop it up” and technological advances remain “exciting enough to distract” from unreasonable valuations.
The veteran professor has previously warned of an “extraordinary overvaluation bubble” and warned that when it bursts, investors would suffer “even worse” than the aftermath of the dot-com bubble. But stocks largely ignored his warnings and continued to rise.
