This AI bubble is 'absolutely' going to burst - analyst (SP500:)

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  Stocks and Investing on Thu, Oct 23rd, 2025 by Seeking Alpha

The AI Bubble Is Set to Pop, Says Seeking Alpha Analyst

In a recent opinion piece that has already stirred debate among investors, a Seeking Alpha contributor cautions that the surge of valuation multiples surrounding artificial intelligence (AI) companies is unsustainable and is poised to collapse. The article—titled “This AI Bubble Is Absolutely Going to Burst—Analyst”—argues that the current enthusiasm for AI is a classic case of speculative euphoria, reminiscent of the dot‑com boom of the late 1990s, and that a correction is inevitable within the next 12 to 18 months.

1. The Anatomy of the Bubble

The author begins by charting the explosive rise of AI‑focused stocks in 2023. In a single year, the Nasdaq AI Index, which tracks companies directly involved in AI development or services, climbed more than 45%. This gain was largely driven by a handful of high‑profile names: NVIDIA, Microsoft, Alphabet, and the newer entrants like Palantir and Databricks. According to the article, market capitalization for AI‑related companies swelled from roughly $1.5 trillion in early 2023 to nearly $2.5 trillion by the end of the year—a 67% jump that outpaces most other sectors.

However, the author stresses that the price growth has been decoupled from earnings. Earnings per share (EPS) growth for the sector, measured at a trailing twelve‑month (TTM) basis, lagged behind market expectations by an average of 28%. Meanwhile, price‑to‑earnings (P/E) multiples for the sector have risen to an average of 47x, compared to the broader S&P 500’s 22x. The article’s data tables show a stark divergence between high‑growth “unicorn” valuations and more established, profitable firms such as IBM and SAP.

2. Fundamental Weaknesses

A key part of the argument hinges on fundamentals. The author points out that the cost of training large language models (LLMs) and other AI workloads has skyrocketed, largely because of the exponential increase in GPU usage. While companies like NVIDIA enjoy economies of scale, their margins have begun to thin: the article cites NVIDIA’s gross margin falling from 71% in 2022 to 65% in 2023, as the demand for data‑center GPUs outpaces supply.

The piece also highlights that many AI companies generate revenue primarily through subscription and licensing fees rather than high‑margin product sales. This structure exposes them to “customer churn” risk, especially as businesses begin to adopt open‑source alternatives or switch providers. For instance, the article quotes a recent Gartner report that predicts a 12% decline in enterprise AI spending over the next two years as budgetary pressures mount.

3. Regulatory and Market Sentiment Risks

Beyond fundamentals, the analyst warns of a looming regulatory tide. In 2024, the European Union introduced stricter AI governance rules that could increase compliance costs for AI firms. The article notes that several large AI companies are already bracing for higher legal expenses, which could compress profitability.

Investor sentiment, according to the article, has begun to shift. Technical indicators for the Nasdaq AI Index show a transition from a bullish to a bearish trend: the 50‑day moving average has crossed below the 200‑day average, a classic “death cross” signal. The author cites a Bloomberg interview with a portfolio manager who said, “We’re watching the volatility spike, and the AI cluster is showing signs of stress.”

4. Potential Impact on the Broader Tech Landscape

The author argues that a bust in AI valuations could ripple through the wider technology sector. Many non‑AI tech companies have increased their exposure to AI through acquisitions or partnerships. A drop in AI stock prices could erode investor confidence in these secondary ventures, leading to a broader pullback. The article references a Wall Street Journal piece that links high AI valuations to increased leverage among tech firms, creating a systemic risk.

Moreover, the author points out that some AI‑driven ETFs may experience significant outflows. For example, the Global X Robotics & Artificial Intelligence ETF (BOTZ) saw a net cash outflow of $120 million in January 2024, according to ETF data. A sustained sell‑off in AI could amplify these outflows, further depressing the market.

5. Investor Takeaway

The article concludes with a set of recommendations for investors. The author advises a cautious approach: “Allocate at most 5% of your portfolio to high‑growth AI names, and focus on companies with proven revenue streams and healthy balance sheets.” He also suggests that investors diversify into traditional growth sectors that are less prone to speculative bubbles, such as renewable energy and healthcare.

Furthermore, the analyst urges investors to keep a close eye on earnings reports. “If we see continued misses against consensus, the market will likely adjust,” he writes. The article’s final warning is a stark reminder: “The AI bubble has peaked; the next 12–18 months could bring a correction that might wipe out more than 30% of current valuations.”

6. Follow‑up Resources

Within the piece, the author links to a few supplementary articles that reinforce the warning. A linked article on Seeking Alpha titled “AI Valuation Trends: Are the Current Multiples Justified?” provides a deeper dive into the comparative multiples of AI versus traditional tech firms, revealing that many AI names are trading at 2–3 times higher valuations than their peers. Another link points to a MarketWatch story about “Regulatory Scrutiny on AI: What Investors Need to Know,” which outlines upcoming EU and US regulatory proposals that could affect profitability.

In addition, the article cites a recent research brief from the Center for AI Governance, which highlights that increased scrutiny could lead to mandatory AI audits, driving up operational costs. These external sources collectively strengthen the article’s thesis that the AI sector is riding on an unsustainable wave of investor optimism.

Final Thoughts

The Seeking Alpha analyst’s piece is a sobering reminder that rapid technological progress does not automatically translate into lasting shareholder value. While AI will undoubtedly continue to transform industries, the current market valuations appear disconnected from underlying economic fundamentals. For investors, the takeaway is clear: remain vigilant, diversify, and be prepared for a correction that could reshape the technology landscape in the coming year.