The AI bubble is already popping; we just don't know it yet

In the latest episode of The Kettle, El Reg editor-in-chief Matt Rosoff and systems editor Tobias Mann analyze the recent Q2 earnings from big tech and the implications for the AI bubble. After a rollercoaster of earnings reports, investors are expressing significant concerns about the state of the market. Matt notes that major tech stocks, which represent much of the market's value, are behaving like penny stocks, with Apple down 10% following a warning about potential lower-than-expected earnings due to high component prices.

Similarly, IBM's stock saw a sharp decline in value after a single-day earnings warning that exceeded its loss since Black Monday in 1987.

Matt explains that this behavior is indicative of a speculative bubble approaching its "pop" phase, characterized by extreme stock price fluctuations and uncertainty among investors. He points to Meta as an example of a company facing significant challenges, with a dramatic decrease in cash flow due to increased capital expenditures (capex) for AI-related data centers. While Meta believes that AI will ultimately benefit its core business, the uncertainty surrounding these investments has led to a sell-off among investors.

Amazon is one of the few companies experiencing a surge in stock price, up 15%, despite its continued capex and higher than expected estimates. However, Amazon's positive movement is rooted in its AWS division, which grew faster than anticipated. Investors are attracted to AWS and its core business, believing that Amazon's investment in AI will pay off in the long run.

However, analysts like Corey Quinn caution that some of the margin increases in AWS's earnings are due to strategic hedging of energy prices, which might not be sustainable in the long term.

The discussion touches on the broader implications of chip stocks crashing and the hedge fund Situational Awareness imploding due to excessive leverage and misinterpretation of earnings data. Matt expresses concern that the AI bubble may already be bursting, and investors are only beginning to realize it. He argues that the hype around AI and the ambitious claims surrounding Artificial General Intelligence (AGI) may be overstated, emphasizing that the market is showing signs of realizing the potential limitations and risks associated with these technologies.