A bubble is developing in the overhyped field of artificial intelligence, said Satori Fund founder Dan Niles, although he believes AI is actually not getting enough attention, given its long-term potential.
In the early stages of a powerful new technology such as AI, “the hype is too much because every company is trying to claim they’re an AI winner,” Niles said during a CNBC interview. But in the long run, as the internet did, AI is “going to change the way we live.”
Niles predicts that AI is “under-hyped long term” and that may mean opportunities for investors. However, just as 4,000-or-so companies went bust during the dot-com bubble when the Nasdaq tanked 78 percent, many claiming to use AI may not survive, Niles said.
“Yes, when everything comes out, it all sounds wonderful,” Niles said. “And then you figure out who are the real winners and losers.”
For example, AI has more staying power than crypto, Niles claimed. “How many people have actually used crypto to go buy anything? Or NFTs? How many people have actually made contact with that? Or the metaverse? The difference here is if you think about AI, everybody’s going to have some kind of contact with it, or learn to use it, or it’s going to impact their jobs.”
Niles stands to profit from investing in the right AI companies. In 2004 he founded and now manages the tech-biased Satori Fund, a large capitalization, long-short equity fund. He earned a master’s degree in electrical engineering from Stanford University and worked as an engineer before launching his Wall Street career in 1990. Niles worked at Lehman Brothers from 2,000 to 2009 as managing director at Lehman subsidiary Neuberger Berman, Inc., and CEO of Neuberger Berman Technology Management, LLC, the former general partner of the funds.
Niles is not alone in thinking AI is a bubble. Bank of America’s Michael Hartnett, chief investment strategist of global research, wrote on May 19 that AI is in a “baby bubble” that could burst if the Federal Reserve pauses rate hikes and then resumes them. The dot-com bust of the early 2000s had its roots in the Fed restarting policy tightening in 1999, according to BofA.
Other investors and strategists say the rush to profit from the new AI technology isn’t necessarily a bubble because it’s mostly concentrated in established blue-chip stocks, rather than riskier startups without other established business lines, Wall Street Journal reported.
Interest from retail investors hasn’t reached a point that suggests a bubble is developing, said Joseph Zappia, co-chief investment officer at LVW Advisors.
“There simply is not enough market cap available to support the buying mania for artificial intelligence,” Zappia said. “If I were to use past frenzies as a reference point, it’s nothing like people saying to me two years ago, ‘What coins should I buy?’ The crypto craze was on a whole other level.”
Niles gives this advice for investors that could help them avoid getting burned by the hype:
Make sure a company using AI has a good management team and the financial stability to withstand an economic slowdown.
Even companies like Amazon saw their stock go from $106 to $6, but Amazon had the financial ability to withstand the bust, Niles said. “If things get tough in the economy, you want to make sure your company has the balance sheet also to withstand this on top of a good management team.”
Look at a company and say, ‘Who are the founders? What kind of strength do they have in execution?’ They may have great technology but … can’t get the product out there or build it or are focused on cash flow or profitability,” he said.
Another thing investors need to do look at is valuation, Niles said. “The valuation gives you a measure of the risk you’re taking on by buying a company.”
Investors should also consider that AI may help certain aspects of a firm’s business but not others, “and so net-net, the revenue … isn’t going to change very much,” he said.
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