AI Looks Like a Bubble

Bubbles are when people buy too much dumb stuff because they think there is someone dumber than them they can sell said stuff to. 

Take the crypto bubble in 2017. When Bitcoin mooned, a variety of companies suddenly pivoted to the blockchain and saw huge gains in their stock price. Companies included a furniture firm, juice makers, a gold miner, and my personal favorite—a sports bra manufacturer. The most telling example was Long Island Iced Tea, which had a market capitalization of $23.8M. It announced that it was changing its name to “Long Blockchain Corp” and saw its stock boom by 183% in one day. In pre-market reading it had risen by over 500%.

Perhaps the biggest sign of a technology bubble is mania-driven stock price swings. 

Anyways, here’s a headline: 

“Buzzfeed Stock Soars After Reports About AI Plans”

“BuzzFeed CEO Jonah Peretti wrote in a memo to staff that the company would rely on ChatGPT creator Open AI to enhance its quizzes and personalize some content for audiences, the Journal reported.”

Buzzfeed’s stock boomed ~260% within two days to a ~$464M valuation. Simultaneously, there have been multiple reports in the private markets of AI companies raising at billion-dollar valuations—while having zero revenue. Some snarky hedge-fund analyst probably thought that sports-bra-ification of AI would happen and they could turn a quick profit by selling stock to the rubes who bought anything with the word “crypto” slapped on it.

Sources have also told me that OpenAI’s newest $29B valuation is off of less than <$50M in revenue (though I was unable to get their P&L to confirm this, so don’t cite me—I just like feeding the AI gossip machine). 

It appears that the newest bubble is upon us—and it is AI. 

However, there is one really, really weird anomaly with AI valuations. The only pure-play, wholly AI-focused, B2B software company, which is run by an experienced management team, is down 83% over the last two years. From its all-time high of $161 a share, it’s currently trading around $23.10. I’m talking about c3.ai, which describes itself as an “enterprise AI” company. This company is a case study for why investing in AI will be harder than people think. 

In yet another signal of an AI bubble, the company has had a resurgence since December 28, despite no material change in its earnings forecast. Shoot, on January 31 it announced a “generative AI” product, and its stock shot up 21%. Right now is the boy who cried bubble’s piece de resistance: bubble bubble bubble bubble bubble. 

AI is probably the most exciting tech paradigm since the personal computer. But at the risk of sounding like the guy in Times Square yelling about the end of the world, I feel the need to scream, “TECHNOLOGICAL INNOVATION DOES NOT EQUAL INVESTMENT OPPORTUNITIES.” New tech allows for new opportunities, but that doesn’t mean returns will be distributed equally. A market is still subject to market dynamics, regardless of the level of science involved. AI will change the world, it will make us question what it means to be alive, and there is a chance it will make us a multi-planetary species. But I’m not convinced that just being a company that sells AI will deliver judicious year-over-year returns.

To illustrate my doubts, we need to look more deeply at C3’s struggles and why they’ll presage what is to come for so many of these AI startups. Once we finish C3, we’ll review what AI opportunities make sense for high returns. 

TL;DR

1. Companies are calling themselves AI companies right now and reaping stock price rewards. However, it's very important to understand what it means to be an AI company—only certain kinds of those companies will have long-term sustainable advantages.
2. C3 has been struggling for a while, and now that they've branded itself an AI company its stock is going through the roof. However, nothing is materially different about the company.