AI Stocks: Bubble or Boom Ahead?

Last Monday, Nvidia (NVDA) and OpenAI announced a "strategic partnership" under which the former will invest as much as $100 billion in the latter. The investment will support new data centers with a capacity of at least 10 gigawatts of power.

According to the Financial Times, the computing capacity could cost nearly $600 billion, with about $350 billion potentially going to Nvidia for its advanced chips used to train and deploy AI models.

Shares of Nvidia rose nearly 4% after the report. The company is the largest in the world, with a market capitalization over $4.5 trillion. Demand for its cutting-edge AI chips shows no signs of slowing.

OpenAI, valued at close to $500 billion, is the most valuable privately held company. While its ChatGPT boasts more than 700 million monthly users, its path to profitability remains unclear.

Nvidia has already invested in several AI-related companies, though at smaller scales. It recently invested $5 billion in Intel (INTC), holds a 7% stake in AI cloud-computing company CoreWeave (CRWV), and is also an investor in Elon Musk’s xAI.

Some analysts raised concerns about the circular structure of the agreement, comparing it to vendor-financing subsidies seen during the dot-com bubble. Critics have also warned about a potential AI bubble, suggesting these large investments are designed to boost demand for Nvidia’s chips.

Nvidia is not alone. Other mega-cap companies such as Microsoft (MSFT) and Amazon (AMZN) have also made large investments in AI startups that, in turn, rely on their cloud-computing products. Microsoft is one of the biggest stakeholders in OpenAI, and Amazon has made huge investments in Anthropic.

Unlike the dot-com bubble, however, the leading players in the race to artificial general intelligence today are highly profitable, cash-rich mega-cap companies investing hundreds of billions to stay ahead.

For them, the greater risk lies in underinvesting and losing the race, not in overspending. Artificial general intelligence could transform our lives and result in enormous productivity gains. Further, valuations are not as extreme as during the dot-com bubble.

These big investments will likely result in handsome returns for some companies, while others may lose money. Some companies are already showing the positive impact of AI on their businesses. That’s why diversified exposure to AI beneficiaries via ETFs makes a lot of sense.

In fact, over the past few weeks we have already seen the AI trade broaden beyond the “Mag 7” group. Companies like Palantir (PLTR) and Oracle (ORCL) have performed much better.

To learn more about the Global X Artificial Intelligence & Technology ETF (AIQ), iShares Future AI & Tech ETF (ARTY) and Roundhill Generative AI & Technology ETF (CHAT), please watch the short video above.

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This article originally published on Zacks Investment Research (zacks.com).

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