Alibaba's Tsai Sounds Alarm On Signs Of AI Bubble: 'People Are Building Data Centers On Speculation' - Alibaba Gr Hldgs (NYSE:BABA), Amazon.com (NASDAQ:AMZN)

Alibaba Group Holding BABA Chairman Joe Tsai has expressed apprehension about a potential bubble in the AI data center construction sector.

What Happened: At the HSBC Global Investment Summit in Hong Kong, Tsai cautioned that the rapid expansion of data centers could surpass the early demand for artificial intelligence (AI) services. He pointed out the reckless rush by tech firms, investment funds, and other entities to set up server bases from the U.S. to Asia, potentially leading to numerous projects being developed without a well-defined customer base, reported the South China Morning Post.

“People are talking literally about $500 billion, several $100 billion [projects]. I don't think that is entirely necessary,” Tsai stated. The Alibaba Chair spoke specifically about the AI investments in the U.S.

"I start to get worried when people are building data centers on speculation,” Tsai added.

Major tech companies like Microsoft Corporation MSFT and SoftBank Group Corp. SFTBY are investing billions in AI development. Alibaba itself has plans to invest over 380 billion yuan ($70 billion) in AI within the next three years.

Tsai voiced concerns about projects seeking funding without first securing uptake agreements. He specifically pointed out the heavy spending by US companies like Amazon.com, Inc. AMZN, Alphabet Inc. GOOGL GOOG, and Meta Platforms Inc. META on AI infrastructure.

Why It Matters: Tsai’s concerns resonate with Edward Yardeni, the President of Yardeni Research who stated that the "AI bubble" could be "bursting.” He stated, "The fear now is that open-source large language models (LLMs) like DeepSeek and Manus, developed in China, require much less powerful semiconductors to operate."

"If so, then AI capital spending will tumble along with the profit margins on AI systems," warned Yardeni.

In February, TD Cowen analysts noted that Microsoft is canceling some U.S. data center leases, raising concerns about potential overinvestment in AI computing capacity.

However, Goldman Sachs analysts predict that AI-related investments in chips and hardware could add $305 billion in revenue by the end of 2025. The analysts also noted that while tech giants are investing heavily in AI infrastructure, leading to a significant semiconductor revenue boom, most companies are still in the early stages of adoption.

Given these factors, Tsai’s warning about a potential bubble in data center construction is significant and warrants attention from investors and tech companies alike.

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