In October, both the International Monetary Fund and the Bank of England issued warnings about a looming AI bubble. AI-related stocks have skyrocketed in value over the last two years, with substantial amounts of venture capital pouring into the industry. 

According to JP Morgan’s AI CapEx Report, the industry would need to generate $650 billion in annual revenue for investors to receive a 10% return on investment by 2030. Using OpenAI as an example, the company started a data center build-out project worth $500 billion, and it is projected to generate $13 billion in revenue.

The separation between invested capital and revenue generated from these companies leaves a significant gap that the AI industry will likely be unable to grow into. As a result, the market will correct, leading to a collapse in AI stock valuations. This begs the question of what an AI bubble burst looks like.

An AI bubble burst would first show as a massive correction in stock valuations for AI-related companies. This would be felt especially in the small-cap market. The AI boom saw a massive expansion in small-cap AI-related businesses that ride on hype rather than a proven business model. These organizations would likely collapse and go out of business.

Large market capitalization businesses will also take a hit. Obvious companies would be Palantir, Meta or OpenAI if they release their IPO. However, Nvidia also stands to take significant damage from a bubble burst. 

As part of AI infrastructure development, Nvidia has taken a leadership role in construction. Not only is Nvidia providing computer chips to these AI companies, but the company is also selling its chips and offering existing infrastructure at a reduced price in exchange for stock in partnered AI companies. 

This leaves Nvidia potentially getting hit on two fronts from a burst. The first is from reduced revenue from a decline in demand for AI computer chips. The second is from the massive loss in equity due to the collapse of AI-related stocks.

It is difficult to predict the effect of a bubble burst of this size on the overall job market and the American economy. There would likely be significant job loss within the technology sector, and this could create a spike in unemployment. 

Depending on the size of the economic shock, the federal government may step in to bail out some of the larger companies in the name of protecting American industry. The future is uncertain; however, with investor confidence at a low and the price of gold rising rapidly, there is a likely threat to the world’s finances on the rise.

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