Citi Believes AI Could be a Bubble, Yet Sustainably Endure

The debate over whether artificial intelligence is causing a bubble on Wall Street has been a hot topic of discussion among investors. While some argue that AI is not creating a bubble, others believe that it is. However, according to Citi, the valuations of certain tech stocks may still have room to grow.

Citi analyst Christopher Danely wrote in a recent investor note that bubbles, like the one seen during the tech bubble of 1999, can last for a year or longer. He added that the current bubble could potentially last until 2025 as long as estimates continue to rise. One sector that has been particularly impacted by the rise of AI is the semiconductor industry.

Companies like Nvidia and AMD have seen significant increases in their valuations in recent years. Nvidia shares have surged by nearly 2000% over the past five years and 266% in the last 12 months, while AMD is up by more than 700% and 109% over the same period. Despite the impressive gains in these stocks, Danely believes that the trend is likely to continue upward.

He pointed out that the valuations of tech companies today are much different from those seen during the late 90s, as the hype is based on real advancements in AI technology. Danely explained that the total addressable market for AI semiconductors has grown from $40 billion last year to $90 billion this year. Some forecasts predict that the global AI accelerator market could reach anywhere between $250 billion and $500 billion over the next three to five years, up from previous estimates.

Given this growth potential and the recent declines in semiconductor unit sales, Danely believes that semiconductor stocks should trade at a premium. He identified Micron as his top pick in the chip space, citing the increase in memory use for AI. Danely also has buy ratings on other semiconductor stocks like AMD, Broadcom, Analog Devices, Microchip, and ON Semiconductor.

While some analysts like Danely see similarities between the current market environment and the tech bubble of 1999, others believe that this is not a bubble, but the beginning of a new era in tech. Wedbush Securities analyst Dan Ives argues that we are on the brink of a fourth Industrial Revolution, driven by the rapid advancement of AI technology. Ives emphasized that tech stocks will not go straight up, but will experience periods of consolidation as more data points emerge across the supply chain and IT spending landscape.

He sees this as a healthy process for the market as it navigates through the growth opportunities presented by the AI revolution. In conclusion, the debate over whether AI is causing a bubble on Wall Street continues to rage on. While some believe that the current market environment resembles the tech bubble of 1999, others view it as the beginning of a new era in tech.

Regardless of the differing opinions, one thing is clear: the impact of AI on the market is undeniable and will continue to shape the future of the tech sector for years to come.