Deutsche Bank analysts have been watching Amazon Prime, it seems. Specifically, the “breakout” show of the summer, “The Summer I Turned Pretty.” In the AI sphere, analysts Adrian Cox and Stefan Abrudan wrote, it was the summer AI “turned ugly,” with several emerging themes that will set the course for the final quarter of the year. Paramount among them: The rising fear over whether AI has driven Big Tech stocks into the kind of frothy territory that precedes a sharp drop.
The AI news cycle of the summer captured themes including the challenge of starting a career, the importance of technology in the China/U.S. trade war, and mounting anxiety about the impact of the technology. But in terms of finance and investing, Deutsche Bank sees markets “on edge” and hoping for a soft landing amid bubble fears. In part, it blames tech CEOs for egging on the market with overpromises, leading to inflated hopes and dreams, many spurred on by tech leaders’ overpromises. It also sees a major impact from the venture capital space, boosting startups’ valuations, and from the lawyers who are very busy filing lawsuits for all kinds of AI players. It’s ugly out there. But the market is actually “more sober” in many ways than the situation from the late 1990s, the German bank argues.
Still, Wall Street is not Main Street, and Deutsche Bank notes troubling math about the data centers sprouting up on the outskirts of your town. Specifically, the bank flags a back-of-the-envelope analysis from hedge fund Praetorian Capital that suggests hyperscalers’ massive data center investments could be setting up the market for negative returns, echoing past cycles of “capital destruction.”
AI has captured the market’s imagination, with Cox and Abrudan noting, “it’s clear there is a lot of hype.” Web searches for AI are 10 times as high as they ever were for crypto, the bank said, citing Google Trends data, while it also finds that S&P 500 companies mentioned “AI” over 3,300 times in their earnings calls this past quarter.
Stock valuations overall have soared alongside the “Magnificent Seven” tech firms, which collectively comprise a third of the S&P 500’s market cap. (The most magnificent: Nvidia, now the world’s most valuable company at a market cap exceeding $4 trillion.) Yet Deutsche Bank points out that today’s top tech players have healthier balance sheets and more resilient business models than the high flyers of the dotcom era.
By most ratios, the bank said, valuations “still look more sober than those for hot stocks at the height of the dot-com bubble,” when the Nasdaq more than tripled in less than 18 months to March 2000, then lost 75% of its value by late 2002. By price-to-earnings ratio, Alphabet and Meta are in the mid-20x range, while Amazon and Microsoft trade in the mid-30x range. By comparison, Cisco surpassed 200x during the dotcom bubble, and even Microsoft reached 80x. Nvidia is “only” 50x, Deutsche Bank noted.