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Artificial intelligence is still just a pricey experiment, AI stocks are in a dangerous bubble, and Nvidia might wither like dot-com darlings Intel and Cisco, according to a markets guru.
AI remains "completely unproven" and "effectively useless," James Ferguson, founding partner of the MacroStrategy Partnership, said on the latest episode of Bloomberg's "Merryn Talks Money" podcast.
He noted that only a few AI tools have taken off, large language models (LLMs) such as ChatGPT can't yet be trusted as they sometimes invent facts and sources, and it takes a lot of energy to power AI programs.
"You end up with something that is very expensive and as yet to prove itself anywhere really, outside some narrow applications," Ferguson said.
The veteran analyst flagged a bubble in microchip makers and other AI companies, warning that tightly concentrated markets with stocks reliant on valuations rising faster than earnings "historically end badly."
Ferguson also underlined how bubbles can lure investors who ought to know better.
"Many, many people who think it'll end badly also feel compelled to play," he said, giving the example of the dot-com bubble at the turn of this century.
"Almost anybody who wasn't a retail punter was looking at these things and saying, 'Well, it can't last. But having said that, if it lasts one more quarter and I'm not playing, I'll lose my job.' So you find a lot of people get forced into the late stages of a highly concentrated, very expensive, parabolic market."
Ferguson also took aim at Nvidia, the chipmaker whose stock has surged more than 700% since the start of last year, valuing the company at north of $3 trillion.
"The more cutting edge the tech, the sooner obsolescence for your particular bit of tech kicks in," he warned.
Cisco and Intel were big stars during the dot-com boom but they're "not even also runs in this one, so next time we have a Big Tech bubble, chances are Nvidia isn't even an also-run. It's probably not going to be a player in a decade's time."
Ferguson recommended investors diversify their portfolios away from large-cap US growth stocks to limit their exposure if the tech bubble bursts.
He suggested seeking bargains in small-cap and emerging-market indexes, and looking into alternative assets such as art, classic cars, and vintage wines that might escape future tax increases.
The market watcher added that a crash can allow bold investors to buy quality assets on the cheap, and if the downturn is accompanied by a recession, interest rates could fall, boosting asset prices.
