Some tech shares are plunging - what does that mean for the AI revolution?

Sharp falls in the value of chip makers have stoked investor concerns that the euphoria around artificial intelligence (AI) related companies is fading. The AI revolution has promised to reshape the way we work and live and has created vast wealth for investors in a handful of companies predominantly in the US and Asia. Companies are desperate to be the winners of a transformative technology that many have compared to the advent of the internet, the telephone, even electricity itself. As Sir Demis Hassabis, founder of UK company Deepmind, which was eventually bought a decade ago by US giant Google, has commented that Artificial Intelligence "cannot be compared to standard technological breakthroughs, not even ones as consequential as the internet or mobile. It is much more akin to the discovery of electricity or fire." Referring to the fact that many chips are made of silicon, which is essentially sand, he added "we've essentially found a way to make sand think. It's miraculous." The euphoria for this technology has boosted the value of some world's biggest companies even as they spend hundreds of billions of dollars on the building blocks of the technology. But over the last few weeks, the value of some of the companies that make those building blocks has plummeted - prompting some to question whether what some have dubbed "the AI bubble" is about to burst. Some of the sharpest falls have been in Asia, with shares in Korean chip makers such as SK Hynix and Samsung down 46% and 35% respectively over the last month as investors worry the recent boom in demand for the chips that power AI is unsustainable. Yet these shares still are up threefold and fivefold respectively over the last year, leading many to conclude that some caution and profit taking after such massive gains was inevitable – and indeed healthy. Shares in Google and Tesla plunged briefly before recovering last week after both firms pledged to spend billions more on AI in the months and years to come despite so far it losing them money. And with other big names such as Meta, Microsoft and Amazon reporting their latest financial results this week, investors have the opportunity to scrutinise just how much these companies are now betting on AI. "There is still a healthy degree of scepticism about the ability of these investments to generate a commensurate level of return," Russ Mould, an investment director at AJ Bell, said. But according to leading tech investor Eileen Burbidge despite the concerns there's not yet a serious reckoning. One of the other triggers for the concerns has been a reported breakthrough in the manufacturing process by a Chinese company, potentially making China more self-sufficient in chip design and production. That has added to lingering concerns that the big AI companies – Meta, Alphabet, Open AI, Anthropic – will find it hard to charge end users enough to justify the hundreds of billions being spent on buying the chips and building the data centres that power the technology. As a result, firms that have announced big increases in spending on AI have not always been welcomed with the same enthusiasm by investors. For example, SpaceX – which is predominantly an AI company - has seen its shares fall 14% from its much-hyped debut on the stock market and nearly 50% from its peak in June. Apple – which has largely sat out the AI arms race – has seen its shares rise 21% over the last month to reclaim its title as the world's most valuable company from chip maker Nvidia. Meanwhile London's benchmark FTSE 100 index which have some have dubbed the "anti-tech index", briefly touched a record high - one of the few periods in recent years where it has benefited from not being tech-heavy. Historically it is possible for investors to lose money even if the technology they are backing succeeds. For example, while railways transformed economies – particularly in the US – plenty of people lost money along the way. Unlike rail tracks – which once built are good for decades – data centres are likely to need upgrading frequently to include the latest and fastest processors. Add to that lot, concerns that some of the big AI companies have taken big stakes or lent money to each other leading to circular funding that means that any potential failures could have a damaging impact on the fortunes of others. A growing number of national, state or local governments are pausing, banning or restricting new data centre construction on environmental grounds thanks to their vast water and energy needs.