AI Bubble Talk May Be the Real Bubble

These days, it’s not unreasonable for investors to feel as if there’s one word attached to AI: “bubble.” AI bubble talk is increasing in frequency, as are comparisons to the internet bubble of 2000.

Predictably, that’s unnerving for investors holding AI-correlated stocks and ETFs like the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). But simply because a topic is oft-discussed doesn’t mean it will come to pass in real time. Many market observers, though muted by the bubble backers, believe AI investing is in bubble territory.

That could be good news for QQQ and QQQM. Those ETFs are in the midst of multiyear bull markets. That’s  due in significant part to large stakes in the leading AI companies, including the Magnificent Seven cohort.

It’s a Different Era

An important point — and one crucial in articulating the bull cases for QQQ and QQQM — is the current era of AI enthusiasm is fundamentally different than the internet bubble.

“The leading cloud service providers (CSPs) are large, rational companies with strong balance sheets and positive free cash flow generation,” observed BNP Paribas. “To date, they have self-funded their AI capex primarily through operating cash flows. During the Internet and telecom bubble of the late 1990s, the companies bearing the brunt of the infrastructure investment were primarily [debt-funded. They] did not have stable cash-generating business segments to support them through the cycle.”

Additionally, those convinced that AI is in bubble seem focused on generative AI’s flaws while ignoring the significant runway for adoption and the points that agentic and physical AI — expected to be AI’s next growth drivers — are still in their respective infancies. As agentic AI evolves and becomes more relevant for daily enterprise use, plenty of QQQ/QQQM holdings could benefit.

Steep Investments Can Occur Before Widespread Monetization

“Agentic AI holds the promise of enabling new use cases where autonomous agents, powered by AI, will reason, plan, and act across IT systems and [data. Thus that will] automate many tasks,” added BNP Paribas. “Physical AI is also on the horizon as AI converges with robotics and other consumer devices. In technology adoption cycles, it is not unusual for steep investments to occur ahead of widespread monetization.”

Also adding to the case for QQQ and QQQM is that today’s valuations on AI stocks look attractive relative to internet stocks 25 years ago.

“We believe the AI theme is not yet in bubble territory. Expectations for the leaders of AI are high, but valuations remain reasonable. However, we are aware of and monitoring several risk factors going [forward. We] are watching for signs of a digestion period in the spending cycle. It is possible that industry consolidation and disruption will occur over time as winners emerge from the arms race,” concluded BNP Paribas.

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