AI Valuations Look Overheated, but Fundamentals Remain Strong

Sam Altman's claim that investors in AI are "overexcited" may be valid, but the tech valuations, particularly the Magnificent Seven's dominance in the S&P 500, look overheated, suggesting a potential correction. OpenAI has real revenues and massive user growth, but its value may decline in the short term. The company isn't worth nothing, but the technical point of view suggests a bubble exists due to overvaluation.

Investor enthusiasm for artificial intelligence (AI) has been waning, as evidenced by a significant sell-off in major tech stocks. The Nasdaq, which is heavily influenced by tech companies, dropped more than 1.2% on Tuesday. Key players such as Nvidia and Palantir experienced substantial declines, with Nvidia falling by 3.5% and Palantir nearly 10% [1].

The sell-off was sparked by an MIT study that claimed 95% of companies investing in generative AI are seeing no returns. Additionally, OpenAI’s Sam Altman warned of a potential bubble in the AI market, drawing parallels to the 1990s dotcom bubble [1]. Despite the MIT study attributing failures to corporate "learning gaps" and flawed integration rather than actual AI model quality, the market reaction highlights growing concerns about AI’s commercial viability.

Nvidia, which recently became the world’s first $4 trillion company, and Palantir, both experienced significant drops. The tech-heavy Nasdaq logged its steepest drop since August, and the rout quickly spread overseas. Korea’s SK Hynix, one of Nvidia’s key suppliers, lost 2.9%, while chip giant TSMC slipped 4.2%. SoftBank, long bullish on AI, cratered more than 7% [1].

The concerns are not new. High-profile figures like Alibaba cofounder Joe Tsai and Bridgewater Associates founder Ray Dalio have cautioned against the pace of the AI boom. Dalio likened today’s Wall Street cycle to the run-up to the dotcom crash of the late 1990s [1]. Chief economist Torsten Slok argued last month that the AI surge could eclipse the internet bubble of the 1990s, noting that the 10 largest companies in the S&P 500 are now more overvalued relative to fundamentals than they were at the height of the dotcom era [1].

On the other hand, Oracle's aggressive expansion in AI and cloud services has set the stage for a major shift in the tech industry. The company’s latest quarterly results reveal a remarkable 27% surge in cloud and AI revenue, amounting to $6.7 billion. This sharp increase, alongside its record-setting $138 billion in remaining performance obligations, signals robust demand for Oracle's cloud offerings [2]. Analysts predict Oracle could achieve a $1 trillion market valuation by 2030, driven by significant revenue gains and strategic partnerships [2].

OpenAI, on the verge of a roughly $500 billion valuation, is another notable player in the AI space. The company’s astronomical burn rate and ambitious growth projections have investors questioning its long-term sustainability. However, OpenAI’s real revenues and massive user growth suggest a different story. The company’s enterprise adoption has surged, reaching 5 million paying business users this month [3].

While the AI sector faces challenges, the market’s reaction to the MIT study and Altman’s warnings indicates a potential correction in tech valuations. The tech stocks may be overheated, and a bubble could be forming. However, it is essential to note that the sector is still in its early days, and the use cases for AI are just starting to expand [1].

References:
[1] https://fortune.com/2025/08/20/us-tech-stocks-slide-altman-bubble-ai-mit-study/
[2] https://menafn.com/1109935807/Oracles-AI-Cloud-Growth-Pushes-Valuation-Toward-1-Trillion
[3] https://www.wired.com/story/openai-valuation-500-billion-skepticism/