With the hype surrounding AI showing little sign of slowing down, one analyst has identified several warning signs that a correction is coming. In a research note titled ‘Magic Money Tree’, Richard Windsor, veteran tech stock analyst and founder of research firm Radio Free Mobile, warned that money was flowing into the AI sector, ‘while very little attention was paid to the fundamentals of companies in a A sign that when the music stops, there won’t be many seats available.” He outlined three recent events that concern him: Valuation of Cohere. The first is that generative AI company Cohere is reportedly on track to raise funds at a $5 billion valuation. That’s almost double its valuation in June last year, when the startup raised $270 million at a $2.2 billion valuation. Windsor described this as “the latest sign of … reckless abandon.” “Cohere will now be worth $5 billion even though its annual revenue in 2023 was only $13 million,” he said in the note on March 28. He said the company’s valuation “equals at a historical price-to-sales ratio of 384x, indicating that investors are once again having a serious case of FOMO (fear of missing out) and are rushing into anything remotely related to AI.” The company’s president, Martin Kon, recently told CNBC that Cohere — backed by Nvidia and founded by ex-Google AI researchers — is betting on generative AI for business use, rather than chatbots. Inflection AI deal Windsor, who covered the global technology sector at Nomura Securities for 11 years before founding his own firm, raised another “red flag”: Microsoft’s apparent deal with Inflection AI. “Another red flag was Microsoft’s ability to hire the CEO and 70 staff members of AI start-up Inflection AI,” he said. “Things didn’t go well at Inflection AI, because if the company had done really well, Microsoft’s claims would have been quickly dismissed.” In what is being described as an “unusual deal”, tech giant Microsoft has reportedly agreed to pay Inflection AI approximately $650 million in cash, allowing it to hire the startup’s staff and use the technology. Investments in Amazon Windsor highlighted the ‘FOMO effect’ around AI, noting that even tech giant Amazon is not immune. “Amazon has committed another $2.75 billion of its total $4 billion commitment to Anthropic, and I’m pretty sure Amazon will eventually acquire the company,” he said. Amazon’s biggest investment ever will see it continue to pump money into the generative AI startup, which has a chatbot Claude that competes with OpenAI’s ChatGPT. Stocks to Buy When ‘Forced’ “The frenzy continues, but I’m comfortable staying far away,” Windsor said of the AI sector at the moment. If “forced” to get into space, Windsor said he would buy Nvidia, noting that the US chipmaker has been the biggest beneficiary of the AI hype so far. The stock is up about 80% this year and 240% in the last twelve months. “Nvidia is really the only company making tangible profits from the current boom in interest in generative AI investment, but if there is a correction, Nvidia will have nowhere to escape, although I suspect it will be far less damaged than the competition. many others,” he said. He added that he already owns chip stock Qualcomm, which is “very well positioned to benefit as generative AI is deployed at the edge.” — CNBC’s Kate Rooney contributed to this report.
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