Lauren Taylor Wolfe, co-founder of activist investment firm Impactive Capital, said the surge in enthusiasm around artificial intelligence has all the markings of a bubble.
“We are absolutely in an AI bubble now. It is going to burst,” she said on CNBC’s “Squawk on the Street” Tuesday to David Faber. “I don’t know when, I don’t know the order of magnitude. A lot of people are going to lose money.”
Her remarks come as enthusiasm for AI continues to drive markets higher, with investors betting the technology will transform industries and lift corporate earnings. Taylor Wolfe said investors are underestimating the risks tied to the surge in AI-related spending by major technology companies.
“There are trillions of dollars that are being earmarked to be spent relative to hundreds of billions of dollars of free cash flow generated by the Mag 7,” she said, referring to the group of large-cap tech stocks that dominate the S&P 500. “They’re going to have to borrow to invest in all this CapEx, and we have yet to see the returns on investment.”
Her remarks come at a time when analysis shows the S&P 500 has become pretty much an AI index.
Taylor Wolfe believes the mismatch between capital expenditures and profit potential makes current valuations difficult to justify.
“Show me the trillions of dollars of profits that are going to be generated in the next five years,” she said. “And you just can’t. The math doesn’t work.”
She said the current environment is reminiscent of the late 1990s, when investors chased anything associated with the internet regardless of valuation or business model. During the dotcom era, the right thing to do wasn’t short the bubble companies; it was to look where no one else was looking, she said.
“You’d have been better off owning a railroad in 2000 than buying Cisco at 35 times earnings, Taylor Wolfe said. “So at Impactive, what we’re doing today is looking for our railroads.”
At the 13D Monitor’s Active-Passive Investor Summit Tuesday, Taylor Wolfe presented her new idea Advanced Drainage Systems, which she called the undisputed leader in plastic stormwater and residential septic systems. She said the company is AI proof.
