Sorry investors, the AI hype that’s gripped the stock market is premature and the bubble will probably burst this year

Sorry investors, you might be jumping the gun on your rush to snap up anything related to the budding world of artificial intelligence, and you should be prepared for the bubble to burst this year.

Wall Street in recent weeks has become fixated on the potential for AI to reshape whole industries, and the corresponding moves in a handful of stocks that are even just adjacent to the space have been huge.

But to one analyst, the hype is overblown, at least for now.

“Is there too much hype? I do think there’s some froth and that you’ll see some of these stocks come down after a little bit,” Pat Tschosik, US sector strategist at Ned Davis Research told Insider, noting that artificial intelligence stocks may only see a boost from the ChatGPT hype for another few months.

ChatGPT — the buzzy AI bot that can write sophisticated prose on a range of topics — was released last November and immediately made headlines on Main Street and Wall Street.

Microsoft stock has surged 12.5% this year as the company expands its partnership with ChatGPT’s parent, and Buzzfeed stock briefly soared over 200% when it said it would use ChatGPT to write content on its website. But even tiny companies with little discernible business in AI have seen a boost from small updates related to the technology.

But while Tschosik is bullish himself on the long-term future of artificial intelligence, he warned that there are two reasons why investors may be getting carried away with the latest craze.

First, there aren’t a lot of contenders in the AI space to choose from, and there’s no way to invest directly in ChatGPT creator OpenAI. This means some obscure artificial intelligence companies could easily be getting overvalued.

In an experiment, Tschosik asked ChatGPT to list the best artificial intelligence stocks. The bot spit out a small but basically accurate list of competitors: Alphabet, Nvidia, Microsoft, and Amazon. With such a small pool, obscure AI stocks have been getting outsized attention from Wall Street investors, helping boost prices higher than they might otherwise go if the sector was more developed.

He pointed to C3.ai, the small artificial intelligence-focused company whose stock has skyrocketed over 176% this year amid the popularity of ChatGPT.

“I think these companies are getting a very large premium, if you’re seen as a pure play on artificial intelligence technology,” he said.

His second concern is that most AI companies are still in the early stages of implementing ChatGPT or other AI into their platforms, and it’s unclear when these efforts will become profitable.

“I think the future of artificial intelligence is very bright, and it’s a matter of discovering what you can do with hese bots to actually generate revenue … I am just starting to question how long does it take these companies to really make money and get profitable from these bots,” he said.

The AI craze, Tschosik says, bears resemblance to the dot-com bubble, which sent the Nasdaq down 20% when it finally burst. The stock market recovered, though some companies never returned to the highs of that era.

“Get a web address and come up with a business plan of how you’re going to take over the world, and you’re valued at a crazy amount of money,” he said of the 2001 era. “I don’t think it will reach that type of froth, but I do think that it’s very easy to run up these companies’ valuations before there’s any real profitability.”

Tschosik gives it six months before some of the hype surrounding AI dies down, and he attributes much of the upward movement in AI stocks to the fact that the market is simply doing well in general in 2023.

“That would be my best estimate as to how long these could run before they come back to earth,” he warned.