Something’s Bubbling in the State of AI. The Players Do Protest Too Much.

An image of Sarah Bernhardt as Hamlet. (Lafayette Photo, London)

Key Points

• Cathie Wood and Oracle CEO Mike Sicilia dismiss the idea of an AI bubble.
• Microsoft’s deal valuing OpenAI at $500 billion added $115 billion to Microsoft’s market capitalization on Tuesday.
• Bill Gates acknowledges potential for many AI investments to be ‘dead ends,’ comparing it to the internet bubble rather than predicting a full collapse.

Hamlet’s mother, Queen Gertrude, wasn’t an easy monarch to convince, even at the theater. “The lady doth protest too much, methinks,” she whispers of an overwrought performance shown on stage in the Shakespearean tragedy.

Investors could learn from Gertrude, a lady dedicated to self-preservation, in assessing comments from players in the artificial-intelligence drama. They insist the billions flowing into the new technology won’t result in a tragedy.

Cathie Wood, an early believer in artificial intelligence’s value and one of the most visible fund managers associated with the AI trade, told an event in Saudi Arabia on Tuesday that we are really only at the early part of Act 1.

“I don’t believe AI is in a bubble,” she said. “What I do think is, on the enterprise side, it is going to take a while for large corporations to prepare themselves to transform.”

Oracle CEO Mike Sicilia, speaking at the same conference, dismissed the notion of an AI bubble. He says demand continues to outpace supply.

There could be some Shakespearean symmetry in the fact that Wood, a player in the new technology trade, and Oracle, which is betting big on AI, made those remarks just hours before Microsoft cemented its holding in ChatGPT maker OpenAI’s for-profit business.

The deal, which values OpenAI at $500 billion, added $115 billion to Microsoft’s market capitalization in the first hours of trading on Wall Street on Tuesday

OpenAI projects overall revenue will rise from $13 billion this year to around $125 billion by 2029. It has reached deals to pay for AI computing power worth more than $1 trillion while handing an equity stake to Nvidia in exchange for chips and gaining a 10% holding in Advanced Micro Devices .

In other words, if there *is* a bubble forming in AI valuations, OpenAI is likely to be the first of the biggest names to pop.

“The lines between revenue and equity are blurring among a small group of highly influential technology companies, to the tune of hundreds of billions of dollars,” wrote financial academics Jeffrey Sonnenfeld and Stephen Henriques in a paper for the Yale School of Management this month.

Microsoft founder Bill Gates, who now devotes his time to climate and philanthropic projects, also spoke to the issue of tech bubbles in an interview with CNBC on Tuesday.

“We need to define ‘bubble’,” he said, arguing that a collapse like the one that followed the tulip mania of the early 1600s isn’t likely to come from what he called “the biggest technical evolution” of his lifetime.

“But if you mean it’s like the internet bubble, where in the end something very profound happened and some companies succeeded, but there were a lot of ‘burning capital companies’ as well…then, yes, a ton of these kinds of [AI] investments will be dead ends.”

Perhaps the biggest factor behind the difference in assessments between Gates, on one hand, and Wood and Sicilia on the other, is that the former Microsoft CEO has made very public plans to give away the vast majority of his wealth. The success or failure of AI as an investment vehicle won’t change that path.

Much of the rest of Big Tech, and Wall Street, is caught up in the hype. So much so that Elon Musk, by most accounts the wealthiest man in the world, has hinted he could leave Tesla, the company he founded, if it doesn’t agree to a $1 trillion pay deal tied in part to AI-related benchmarks.

The desire to believe that current valuations are justified, and could keep rising, may explain, at least in part, the volume of voices lining up to dismiss the notion of an AI bubble, while simultaneously justifying the fact that AI-related stocks have accounted for 75% of the S&P 500 ’s return since the launch of ChatGPT in November of 2022.

Hamlet’s friend Marcellus famously warned him that there was “something rotten in the state of Denmark” before his empire collapsed around him.

I wonder what Marcellus, and Queen Gertrude for that matter, would say about AI?

Write to Martin Baccardax at martin.baccardax@barrons.com