Lauren Taylor Wolf, co-founder of activist investment firm Impactive Capital, said the growing enthusiasm around artificial intelligence has all the hallmarks of a bubble.
“We’re completely in an AI bubble right now, and it’s going to burst,” she told David Faber on CNBC’s “Squawk on the Street” on Tuesday. “We don’t know when or how much we’re going to suffer losses. A lot of people are going to suffer losses.”
His comments come as enthusiasm for AI continues to drive the market, with investors betting the technology will transform industries and boost corporate profits. Taylor Wolf said investors are underestimating the risks associated with the surge in AI spending by big tech companies.
“Trillions of dollars in spending are being allocated relative to the hundreds of billions of dollars of free cash flow that Mag7 will generate,” he said, referring to large-cap tech stocks that make up most of the S&P 500 index. “To fund all of this capital investment, we’re going to have to borrow, and we don’t see the return on investment yet.”
Her remarks came as analysis shows the S&P 500 is becoming almost an AI index.
Taylor Wolf believes the mismatch between capital expenditures and potential returns makes it difficult to justify current valuations.
“Show me the trillions of dollars in profits that will be generated over the next five years,” she said. “And that’s not possible. The math doesn’t work.”
The current environment is reminiscent of the late 1990s, when investors were chasing anything internet-related, regardless of valuation or business model, she said. In the dot-com era, shorting bubble companies was not the right thing to do. She said it was to see where no one else was looking.
“It would have been better to own a railroad in 2000 than to buy Cisco at 35 times earnings, so what Impertive is doing now is look for a railroad,” Taylor Wolf said.
At 13D Monitor’s Active/Passive Investor Summit on Tuesday, Taylor Wolf announced a new idea, Advanced Drainage Systems, calling it the undisputed leader in plastic rainwater and home purification systems. She said the company has proven AI.
