BofA named four signs that there is no bubble in the AI market. What threat he saw

Bank of America analysts have recognized that the rapid growth of investment in artificial intelligence may lead to excessive infrastructure construction. However, according to their assessment, there are four key signs that make it possible to see the difference between the AI boom and the dotcom bubble, to which the current situation is often compared.

The boom in building data centers for AI development is significantly different from the dot-com bubble of the early 2000s and seems much more sustainable, according to a team of Bank of America analysts led by Vivek Arya. They recognize "some risk of overbuilding infrastructure" because estimating future capacity needs remains difficult, MarketWatch reports . However, funds are now being allocated more rationally and the market looks more balanced, the analysts said. They identified four key differences that, in their view, make them cautiously optimistic about what's happening in the AI market.

1. Capacities are indeed utilized

Unlike the "dark fiber" of the Internet boom - redundant, unused fiber optic lines that have become a symbol of overinvestment without real demand - AI capacity is being actively used, BofA notes. Cloud service providers are steadily building up computing resources. Demand is so high that even Nvidia Hopper chips released three years ago are running at full capacity, analysts note.

In addition, the main limitations to the growth of AI infrastructure are related not to technological overheating, but to physical factors - the amount of energy, data center space and water volume. Even giants like OpenAI will only be part of a broad ecosystem of cloud providers competing for these resources, analysts say, and note that this provides a more balanced pace of development.

At the same time, the spread of AI does not require significant upgrades to telecom networks. OpenAI can reach 1 billion users in three years, BofA predicts. It took Facebook eight years to achieve this, and Google 13 years.

2. Companies have their own resources for growth

The main difference from the 2000s is in the sources of funding, the bank's analysts point out. Today's leading cloud corporations have stable operating cash flows to cover capital expenditures. If in the dot-com era, companies lived off debts, today the key players in the AI market finance their own development: they allocate up to 25% of revenue for capital expenditures, while maintaining an operating cash flow of over 30%.

3. Support from the Fed

Another positive factor, according to BofA's assessment, is the hope that the U.S. Federal Reserve will continue to lower interest rates. In 2000, when the dot-com bubble collapsed, and during the global financial crisis of 2008, market collapses were accompanied by a tightening of Fed policy. Today, the expected easing creates a more favorable environment for investment, analysts say.

4. Reasonable stock valuations

The valuations of AI market leaders are significantly lower than those of Internet boom companies, BofA compares. For example, the main beneficiary of the AI boom, Nvidia, trades at a P/E multiple of 29, meaning investors are paying $29 for every dollar of the company's expected 2026 earnings. Bank of America estimates that's "significantly lower" than the chipmaker's potential - its ability to generate profits in the future - allows. Before the dot-com market crash, shares of Cisco, Nortel and Yahoo were trading at multiples of 100 or higher, reflecting the market's apparent overheating, analysts recall.

Analysts see the main risk not in the market overheating, but in the escalation of the trade confrontation between the U.S. and China over the supply of rare-earth metals, critical for the production of chips.

Bank of America said it remains "attentive but optimistic" about chipmakers Nvidia, Broadcom, AMD and Credo Technology and their partners that produce memory, optics and semiconductor equipment.

Notably, according to the latest Bank of America survey, a record share of global fund managers believe AI stocks are overvalued and on the verge of a bubble, Bloomberg reports . In October, 54% of respondents said that technology securities look too expensive. Managers named a bubble in the AI market as the main risk, followed by rising inflation and the threat of the Fed losing its independence. BofA strategist Michael Hartnett said AI concerns are one of the factors holding back a shift to a "fully bullish" investor sentiment.

Despite growing fears of overheating, managers remain relatively optimistic, with the share of investments in U.S. stocks rising to an eight-month high and recession fears falling to their lowest level since early 2022.

This article was AI-translated and verified by a human editor