AI Investment Bubble Bursts: Investors Demand Profits Over Promise

Reality Check for AI Investments

Investors are starting to question the huge amounts of money being spent on artificial intelligence (AI) without seeing any significant profits in return. According to economist William Lee, the excitement around AI investments is fading away, and a more cautious approach is taking its place.

A Shift in Sentiment

William Lee, chief economist at the Milken Institute, said on CNBC TV18 that the narrative around the AI trade is losing steam. The main issue is that investors are realizing that large-scale spending on capital expenditure (capex) must eventually lead to tangible financial returns.

Lee explained that investors are asking questions like: Do we really need this amount of capex spending? And if we do, where's the cash flow that's associated with the profits? He pointed to Oracle's recent performance as an example, where the company's stock faced pressure after announcing a need for more capex spending without providing a clear roadmap for the expected payoff.

Alternative Models and High-Interest Rates

Lee also mentioned that China is pursuing an alternative model for AI development, which focuses on software and algorithms rather than just raw compute power. This approach challenges the prevailing belief in the West that superior AI is solely a function of greater computing infrastructure.

The current high-interest-rate environment is also acting as a catalyst for this shift in investor sentiment. According to Lee, higher rates are forcing a discipline on the market, helping to differentiate between genuinely viable investments and more speculative ventures. Only the good investments will survive, he said.

A New Era of Accountability

The market is no longer willing to fund every project that sounds like a good AI idea in a laboratory or textbook. Blank cheques for AI-related projects are now facing scrutiny, with markets demanding clear evidence of profitability and sustainable business models. As Lee put it, the markets are finally starting to hold back and say, 'hey, we can't finance every stupid project that sounds like it's a good AI idea'.

• AI investments are facing a reality check
• Investors are demanding profits over promise
• Alternative models are being explored, such as China's focus on software and algorithms
• High-interest rates are forcing a discipline on the market