Analysts at Yardeni Research have expressed concern about the ongoing surge in AI technology, identifying two major risks that could stifle the sector's explosive growth.
While AI is expected to bring revolutionary change across industries, there are also signs of “AI inflation” to watch out for.
First, the unprecedented influx of capital into AI startups is a red flag: Yardeni Research highlights that “investors have poured $330 billion into 26,000 AI startups over the past three years,” which is significantly more than in previous years.
The firm said that while this influx of capital has spurred innovation, it has also led to a crowded market where many companies are struggling to turn a profit. Stability AI, for example, faced financial difficulties that led to staff cuts and the departure of its CEO.
Similarly, Inflection AI has raised more than $1.5 billion in funding, but its management team has moved to Microsoft (NASDAQ:), it adds. The concern is that “if an AI startup runs out of cash, its suppliers could see AI-related revenue dry up quickly.”
Second, analysts warn that claims from AI industry leaders signal a potential bubble. Nvidia (NASDAQ:) CEO Jensen Huang has described the company's Blackwell architecture platform as “the most successful product in the history of computing.”
But analysts caution that they “don't believe the semiconductor cycle is over,” and AI-driven efficiency gains may not completely avoid the industry's inherent volatility.
Yardeni Research acknowledges the potential of AI, but points out that “doubling the size of the global economy in 10 years is a big claim.”
In summary, Yardeni Research feels that although AI holds great potential, investors should remain cautious amid the current AI technology rally due to the twin risks of excessive capital inflows and inflated expectations.
