Lauren Taylor Wolfe, co-founder of activist investment firm Impactive Capital, said the growing enthusiasm for artificial intelligence has all the hallmarks of a bubble.
“We're absolutely in an AI bubble now. It's going to burst,” she told David Faber on CNBC's “Squawk on the Street” on Tuesday. “I don't know when, I don't know the magnitude. A lot of people are going to lose money.”
Her comments come as enthusiasm for AI continues to drive markets higher and investors are betting that the technology will transform industries and boost corporate profits. Taylor Wolfe said investors are underestimating the risks associated with the surge in AI-related spending by big tech companies.
“There are trillions of dollars slated to be issued versus hundreds of billions of dollars in free cash flow generated by Mag 7,” she said, referring to the group of large-cap technology stocks that dominate the S&P 500. “You will have to borrow to invest in all this CapEx and we have yet to see the return on the investment.”
Her comments come at a time when analysis shows the S&P 500 has pretty much become an AI index.
Taylor Wolfe believes the mismatch between capital spending and earnings potential makes current valuations difficult to justify.
“Show me the trillions of dollars in profits that will be generated over the next five years,” she said. “And you just can't do that. The math doesn't add up.”
She said the current environment was reminiscent of the late 1990s, when investors pursued anything related to the Internet, regardless of valuation or business model. During the dot-com era, it wasn't right to sell the bubble companies; It's about looking where no one else is looking, she said.
“It would have been better to own a railroad company in 2000 than to buy Cisco for 35 times earnings,” said Taylor Wolfe. “So today at Impactive we’re looking for our railroad companies.”
At the 13D Monitor Active-Passive Investor Summit on Tuesday, Taylor Wolfe presented her new idea Advanced drainage systems, She called it the undisputed leader in plastic stormwater and residential wastewater treatment systems. She said the company is AI-safe.