The AI tech boom: Incredible growth….. but what could go wrong?

Ever since OpenAI released ChatGPT in November 2022, the investment landscape has shifted. Artificial Intelligence or AI is now a daily headline, and company valuations have climbed fast.

Since November 2022, we’ve seen:

• Companies that announce a new AI product or “bot” often enjoy a short‑term share‑price jump.
• The largest US tech firms plan to spend extraordinary sums on AI‑related technology this year—figures commonly quoted are in the hundreds of billions of US dollars.
• The Nasdaq—an index heavy with big US tech companies—has returned around 125% over this period. Over 40% a year!

The market returns have been exciting. But there are real risks to keep in mind.

Concentration risk: too many eggs in a few baskets

Roughly a third of the US share market’s value sits in just seven companies: Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Meta (Facebook), and Tesla. When leadership is this narrow, the whole market can wobble if even one or two of them disappoint.

The AI spend is massive—and often circular

AI needs expensive chips, data centres and huge amounts of power. While numbers like “US$430 billion” are eye‑catching (and the spending is indeed large), a lot of it flows between the same few firms.

• For example, chipmakers fund AI companies to build data centres—and those companies, in turn, commit to buying the chipmakers’ hardware.
• Microsoft invested heavily in OpenAI and is using OpenAI’s tools in its own software.

This “closed loop” can amplify hype. It also raises a key question: will the profits from AI products arrive fast enough to justify all this capital expenditure?

Not every player will win

Industry forecasts suggest AI‑related spending could reach into the trillions of dollars by 2029. Even cash‑rich firms like Meta, Amazon and Alphabet could see free cash flow tighten and balance‑sheet debt rise.

Some will earn strong returns on that spend. Others won’t. Expect new winners—and a few casualties—along the way.

China versus the US: a strategic tug‑of‑war

AI’s supply chain runs through advanced semiconductors and critical minerals. The US currently leads in high‑end chip design; China leads in several key minerals.

US export rules already limit sales of top AI chips to China, while China has threatened restrictions on certain materials in response. Policies can change quickly—and with them, company sales and margins. No one knows exactly how this will land.

Energy and infrastructure limits

AI models don’t just need chips—they need electricity. A lot of it. Some estimates suggest that by 2030, AI could require multiple times Australia’s current electricity output. This is happening while many regions face rising power prices.

It’s no surprise that Amazon, Meta and Microsoft are exploring dedicated energy sources, including nuclear, to secure long‑term supply. Energy costs and grid capacity could become real speed limits for AI.

“Picks and shovels” versus “gold miners”

In a gold rush, more people profited from selling picks and shovels than from finding gold. In AI, the “picks and shovels” might be chipmakers, data‑centre builders, fibre networks and energy providers. The “miners” are the companies training and deploying AI models. Both sides have opportunities—and risks. There are no guaranteed winners.

Bottom line

Invest with caution. Diversification is needed now more than ever. Australian and International shares, property, precious metals and infrastructure should all be included in your investments.

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