Last week, NVIDIA released its earnings report for the first quarter of 2024.

Once again, America's third-largest company massively outperformed expectations, with quarterly revenue soaring by 262% year-on-year, driven by massive demand for both its current-generation Hopper GPUs and its new Blackwell chips.

Unsurprisingly, these results sent NVIDIA's stock soaring, and as of Thursday, shares are now trading about 20% higher than they were pre-earnings.

All in all, this means NVIDIA's stock has doubled since the beginning of this year, and multiplied tenfold since October 2022.

Now, while NVIDIA's numbers are clearly great, the dizzying rate at which its stock has climbed, accompanied by similar claims among other AI highs, might in fact be a bit of a bubble.

So, in this video, we're going to have a look at why some people think the AI boom is really a bubble, why other people disagree, and why both sides could be sort of right at the same time.

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Now, before we get into it, the first thing to say is that this is not investment advice, and more generally, don't take investment advice from YouTubers.

So, caveats aside, let's dive in.

Is the AI boom actually a bubble?

Well, the honest answer is that no one knows.

So, we're going to present both sides of the argument, and you can make your mind up for yourself.

Broadly speaking, there were two types of arguments on either side.

There's a technological argument over whether or not AI is actually the revolutionary technology that its advocates claim it to be, and there's a more financial argument about whether or not the stock market is looking bubbly at the moment.

So, let's start by looking at the arguments against AI being a bubble.

The main arguments made on this side is a technological one, that generative AI is a genuinely unprecedented technology that merits the enormous investments in valuations that we've over the past couple of years.

ChatGBT, for instance, was the fastest spreading tech platform in history, with an estimated 100 million monthly users only two months after launch.

And AI's most bullish advocates argue that its ability to perform language-based cognitive tasks could transform our economy.

Goldman Sachs, for instance, expects AI to essentially double the rate of US productivity growth, while McKinsey reckons that AI and associated automation technologies could increase global GDP growth by an upper limit of 3.4% over the coming decade, more than doubling the global GDP growth rate.

The most bullish AI advocates, like these guys, expect AI to increase global GDP growth by more than 5%, which, assuming a baseline of about 3%, would imply a doubling of global GDP in the next 10 years.

If these numbers are even close to the mark, then the extravagant valuations we've seen recently are easily justified.

The second argument is that we haven't seen a proliferation of so-called bullshit companies that you usually see during bubbles.

In the dot-com bubble, for instance, there were a whole load of companies that were basically just domain names rushing into IPOs and achieving eye-watering valuations.

Similarly, in the crypto bubble a couple of years ago, there were a whole load of clearly bullshit meme coins that had no real value apart from their ridiculous names.

Rather, most of the AI-related gains have been captured by the so-called Magnificent Seven, so Tesla, Meta, Alphabet, Apple, Amazon, Nvidia, and Microsoft, none of which could really be described as bullshit companies.

The third argument is that even though the Magnificent Seven have seen steep rises in the market cap recently, they're not drastically overvalued.

This is in part because some of their recent growth is, in a sense, a recovery from the in late 2022 and their price-to-earnings ratios haven't changed drastically in the last couple of years.

A useful comparison can be made between Nvidia today and Cisco during the dot-com bubble.

During the 90s, Cisco was most focused on building routers and other internet hardware, in much the same way that Nvidia today is more about building the infrastructure behind the tech rather than the tech itself.

But at the peak of the dot-com bubble, Cisco's two-year forward price-to-earnings ratio, that is, the ratio between its current market cap versus its forecast earnings in two years time, was over 100.

Nvidia's two-year PE ratio, however, is only 27, high by normal standards but not absurdly so.

Alright, so those are the arguments against AI being a bubble.

Let's take a look at the other side.

The first argument is a technological one, that AI isn't all it's cracked up to be.

Proponents of this argument might point to AI's apparent plateau, the lack of obvious use cases, or like in AI, to previous innovations that just haven't come through.

But the second and perhaps more popular argument is that even if in the aggregate the Magnificent 7's PE ratio hasn't changed all that much, it's still gone up a bit and certain companies have seen bubble-esque increases.

For instance, the combined market value of Alphabet, Amazon and Microsoft has jumped by $3 trillion during the AI boom, 150 times the $20 billion in revenue they expect to come from generative AI.

Even Nvidia looks a bit bubbly.

Its current PE ratio is nearly 70, more than double the other Magnificent 7 stocks, and while it justifies this with reference to future sales, this all assumes that Nvidia continues to dominate the chips market for the next couple of years and that demand for chips holds up.

Which is possible, but not inevitable.

The final argument is that even if we haven't seen that many bullshit companies, AI is clearly a bit of a corporate fad at the moment, as evidenced by the exponential rise in earnings call mentioning AI.

And while the Magnificent 7 have captured most of the AI boom, AI startups are increasingly popular with venture capital, despite an otherwise difficult investment climate.

Ultimately, no one knows, and we'll just have to wait to see if or when the bubble pops.

But perhaps it's possible that both sides are sort of right.

Some bubbles, like the NFT bubble a couple of years ago, or the original tulip bubble in the 1630s, are wholly speculative.

There's no justifying the price, and people are only buying because they think they'll be able to sell on to someone else at a higher price.

But some bubbles are based on a genuinely revolutionary technology.

It's just that market enthusiasm outruns the industry.

The fibre optic bubble in the 80s and the dotcom bubble in the 90s, for instance, were predicated on the revolutionary potential of the internet, which turned out to be correct.

It's just that everyone got a bit too excited a bit too early.

It's possible that AI will end up being the same sort of thing.

A revolutionary technology that just takes a bit longer to on tons of data analysis to interpret crucial economic data and understand political decisions.

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