Nvidia, Amazon And Microsoft's Recent Activity Indicate Impending AI Bubble: 'When The Music Stops There Will Not Be Many Chairs Available'

The ongoing excitement surrounding AI has prompted an analyst to highlight potential indicators of an impending market correction. Richard Windsor, a seasoned tech stock analyst and founder of Radio Free Mobile, has identified three recent occurrences that could signify an AI bubble.

What Happened: In a research note named “Magic Money Tree,” Windsor voiced concerns about the influx of money into the AI sector without adequate attention to company fundamentals, CNBC reported on Thursday. He pointed out three developments that have raised red flags for him.

The first is the reported $5 billion valuation of NVIDIA-backed NVDA generative AI company Cohere, which almost doubled its value last June, despite a 2023 annual revenue of just $13 million. Windsor called this a “reckless abandonment.”

The second warning sign was Microsoft’s MSFT deal with Inflection AI, indicating that things were not going well at the AI startup. The “unusual deal” allegedly involves Microsoft paying around $650 million in cash to hire Inflection AI’s staff and use its technology.

The third concern is Amazon’s AMZN additional $2.75 billion investment in Anthropic, a generative AI startup. Windsor highlighted the “FOMO effect” around AI, noting that even tech giants are not immune to it.

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Windsor also mentioned that he would invest in Nvidia if compelled to enter the AI sector, as the U.S. chipmaker has been the primary beneficiary of the AI hype. Despite an 80% year-to-date increase in its stock, he warned that Nvidia would not be immune to a market correction.

Windsor added that "with very little attention being paid to company fundamentals in a sure sign that when the music stops there will not be many chairs available."

"The frenzy continues but it is one I am perfectly comfortable staying well away from."

Why It Matters: The AI sector’s rapid growth has attracted significant attention from investors and analysts alike. Just a day before Windsor’s note, it was reported that Microsoft was the most-purchased AI stock by Congress, surpassing Nvidia. This indicates the widespread interest in AI and the potential impact of major players in the sector.

Moreover, the launch of NVIDIA’s latest AI chips has led to a bullish prediction by Goldman Sachs for significant growth in the memory chips used in AI systems. This suggests that the AI sector’s growth is not just speculative but also supported by technological advancements.

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