AI Data Center Mania is 'Epic Bubble,' Says Brad Conger

Brad Conger, Chief Investment Officer at Hirtle, Callaghan & Co., discusses why he thinks the AI data center boom shows all the hallmarks of an investment bubble.

This year’s frenetic rally in global semiconductor stocks hit a setback on concerns that valuations for some of the biggest winners have soared too quickly and that gains have been excessive.

Shares of Advanced Micro Devices Inc. were more than 4% lower in premarket trading Wednesday, after the chipmaker’s guidance failed to meet investors’ high expectations. AMD’s results followed a 4.1% decline in the Philadelphia Semiconductor Index on Tuesday, the sharpest drop in more than three weeks.

The chip stock slump spread to other markets on Wednesday. In Asia, Taiwan Semiconductor Manufacturing Co. declined 3%, while losses in Samsung Electronics Co. dragged South Korea’s Kospi benchmark down 2.9%. In Europe, Dutch chip equipment makers ASML Holding NV and ASM International NV each fell 2%.

The pullback underscores investors’ growing unease over the sector’s sky-high valuations, even though big tech firms are still pouring billions into infrastructure for artificial intelligence. Chipmakers have added trillions of dollars in market value since a low in April as investors bet on soaring demand for computing power.

“There’s been a lot of concerns about the AI trade,” Morgan Stanley strategist Marina Zavolock said in a Bloomberg TV interview. “We think we will pass this storm and there’s more to go in the AI trade, but this isn’t the first time that you have weakness and bubble concerns.”

A warning from Wall Street chief executives of an overdue correction have weighed on the market this week, alongside reduced expectations for Federal Reserve rate cuts and a prolonged US government shutdown. Hedge fund manager Michael Burry added to the the negative tone with his disclosure of bearish wagers on Palantir Technologies Inc. and Nvidia Corp.

Palantir’s outlook on Monday failed to meet the most bullish expectations after the stock already more than doubled this year. A similar reaction to AMD’s post-market results influenced trading in Asia and Europe on Wednesday.

SFor almost as long as the artificial intelligence boom has been in full swing, there have been warnings of a speculative bubble that could rival the dot-com craze of the late 1990s that ended in a spectacular crash and a wave of bankruptcies.

Tech firms are spending hundreds of billions of dollars on advanced chips and data centers, not just to keep pace with a surge in the use of chatbots such as ChatGPT, Gemini and Claude, but to make sure they’re ready to handle a more fundamental and disruptive shift of economic activity from humans to machines. The final bill may run into the trillions. The financing is coming from venture capital, debt and, lately, some more unconventional arrangements that have raised eyebrows on Wall Street.

Even some of AI’s biggest cheerleaders acknowledge the market is frothy, while still professing their belief in the technology’s long-term potential. AI, they say, is poised to reshape multiple industries, cure diseases and generally accelerate human progress.

Yet never before has so much money been spent so rapidly on a technology that remains somewhat unproven as a profit-making business model. Tech industry executives who privately doubt the most effusive assessments of AI’s revolutionary potential — or at least struggle to see how to monetize it — may feel they have little choice but to keep pace with their rivals’ investments or risk being out-scaled and sidelined in the future AI marketplace. Sharp falls in global technology stocks in early November underscored investors’ growing unease over the sector’s sky-high valuations, with Wall Street chief executives warning of an overdue market correction.

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