Although for many individuals in the UK the focus remains next week’s budget, markets are once again focused on AI. For much of the past three years, artificial intelligence has provided investors with one of the most powerful market narratives imaginable but the recent sell-off in semiconductor and AI-related stocks suggests this enthusiasm is now coming up against a more awkward question: will the extraordinary sums being invested generate an adequate return?
The warning signs are mounting. Asian semiconductor shares fell sharply last week, while US chipmakers including Nvidia, AMD and Micron also came under pressure as investors reassessed the valuations attached to the AI boom.
Perhaps the most striking warning came from Hock Tan, chief executive of Broadcom, itself one of AI’s biggest beneficiaries. Tan said many investors “have no clue what they are investing in”, arguing that extreme expectations meant the market was becoming “almost like they are in a casino”. He also suggested that access to capital, rather than chips or memory, could become the industry’s biggest constraint.
The constraints are not purely financial. Microsoft has pulled out of an agreement with Nscale to use a planned AI data centre in Essex. The site has faced serious electricity supply delays, with sufficient grid power reportedly unavailable until the 2030s.
And there lies the problem. The AI revolution may ultimately prove every bit as transformational as its supporters believe, but investors have priced in enormous growth while often overlooking the cost of delivering it.
Building the data centres, buying the chips and securing enough electricity requires staggering amounts of capital. The recent correction does not necessarily signal the end of the AI boom. It may, however, mark the point when investors stop rewarding ambition and start demanding returns.
Capital at risk.
