Banking giant Goldman Sachs believes that the AI boom has yet to hit true bubble territory, but warns that hyperscalers could be marching toward the point of collapse.
In a new episode of the Goldman Sachs Exchanges podcast, the bank’s head of internet equity research, Eric Sheridan, says today’s AI cycle doesn’t perfectly mirror the late-1990s boom.
While the current boom has some resemblance to past tech bubbles, he notes that hyperscalers are still standing on a solid financial footing.
“Do I see signs that point me back to the late 90s or the 07 time period? Sure.
Private market valuations are well ahead of public market valuations. Public market valuations are above historical norms, but they’re also below the peak of public market valuations that you saw in 99 and 2000. Capital market activity is still well below the levels that we’re seeing in 2020, 2021, 2007, 2008, 1998 and 1999.
So I would argue there are signs of exuberance. There are signs that rhyme with past periods of time. But I wouldn’t necessarily align it perfectly with some of the lessons we’ve learned in prior periods, at least not yet.
Now, that’s arguably a duration narrative that I’m saying, that we’re just not there yet. That would be one framing I would give. The other thing that is a little bit different than prior periods… it was companies that generated no revenue that were driving the most exuberant valuations in the market. The Magnificent Seven, most of those companies generate outsized levels of free cash flow and buy back their stock and pay dividends. There were very few companies buying back their stocks and paying dividends in 1999. So there are some key distinctions I would keep in mind.”
According to Sheridan, his stance that AI is not yet in bubble territory will change if hyperscalers stretch capital beyond the point of return.
“I mean, at the end of the day, it’ll be very hard to argue if companies spend in a way that eventually puts their free cash flow generation at real risk. And that typically can be a tipping point in the market, people cutting dividends, cutting buybacks, things like that, excessive use of debt. Those are things that I am watching for.”
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