New Delhi [India], November 25 (ANI): The current rally in artificial intelligence (AI) related investments is justified and sustainable, and there are no signs of a bubble forming at this stage, highlighted a latest report by JP Morgan.
The report noted that while the ingredients for a market bubble do exist, including high expectations and rapid investment flows, the present cycle is supported by strong fundamentals such as massive capital expenditure (Capex) and accelerating adoption.
The report stated that "The ingredients are certainly in place for a market bubble to form, but for now, at least, we believe the rally in AI-related investments is justified and sustainable. Capex is massive, and adoption is accelerating."
It added that historically, bubbles often emerge from the belief that a new technology or structural shift will fundamentally change the world. Examples include the railroad boom of the 1840s and the Internet boom in the late 1990s.
The report explained that both the railroad and internet booms did eventually transform the world, but they also created excess capacity far ahead of real demand. Between 1843 and 1853, railway miles in the United Kingdom nearly quadrupled, yet revenue per mile remained flat or declined.
Similarly, by mid-2001, telecom companies had installed 39 million miles of fibre, but only 10 per cent of that fibre was active, and each active fibre was using only 10 per cent of the available wavelengths.
The report said that today's AI boom does feature similar levels of rhetoric, optimism and large investments expected during a major technological shift. However, unlike past bubbles, there is currently no excess capacity.
Data centre vacancy rates are at a record low of 1.6 per cent, and three-quarters of the data centre capacity under construction is already pre-leased.
It highlighted that across the computing, power and data centre value chain, components remain scarce relative to demand. Recent earnings seasons have also confirmed that AI adoption is supporting revenue growth for the largest technology companies.
The report also noted that bubbles tend to expand when cheap speculative capital pushes prices higher and when financial structures amplify gains and hide risks.
The report acknowledged that leverage is expected to rise as AI investment continues, but unlike past speculative cycles, AI spending today is being funded by real cash flows rather than excessive borrowing. It added that traditionally, bubbles inflate when valuations climb far beyond what fundamentals support. Yet, in public markets, AI companies have generated their returns entirely through earnings growth.
Over the last three years, the forward price-to-earnings (P/E) multiple of publicly traded AI companies has actually declined, while earnings per share (EPS) estimates have more than doubled.
It stated that financial innovation in the AI sector is accelerating, and the firm is monitoring signs of deteriorating underwriting standards, whether related to power purchase agreements or private equity and venture capital investments.
However, so far, for major companies, aggregate cash flows from operations still exceed capital expenditures and dividends, showing financial strength.
JP Morgan concluded that these trends suggest strong fundamentals behind current market performance rather than speculation-driven pricing. (ANI)