AI is a planet-sized bubble, Microsoft's stock drop is a warning of what's ahead: Gordon

Rampant speculation and massive overinvestment in AI have created a financial threat of cosmic proportions — and the fallout will be catastrophic, Erik Gordon has warned.

“The AI bubble is almost as big as the planet Jupiter,” Gordon, an entrepreneurship professor at the University of Michigan’s Ross School of Business, said in a Wednesday email to Business Insider.

“When it bursts, the debris will be everywhere,” he continued. “Big, institutional investors will be hit with it, and so will individual investors who bet the bubble would get even bigger.”

Gordon pointed to Microsoft stock, which tumbled more than 6% after the software giant’s earnings beat on Wednesday. It was trading around 12% lower at 12:30 p.m. ET on Thursday, marking one of the sharpest intraday declines in the company’s history.

Microsoft’s shares sank “because of the truckloads of cash it is investing in AI,” Gordon said. “That is a warning of the burst to come.”

The cloud-computing titan’s net cash used in investing surged 95% year-on-year to over $57 billion in the six months to December. That was fueled by its addition of $49 billion worth of property and equipment such as data centers.

Prior to their post-earnings slump, Microsoft’s shares had roughly doubled since the start of 2023, lifting the company’s market value to over $3.5 trillion.

Other AI stocks have surged even faster over that timeframe. Shares of chipmaker Nvidia have vaulted 13-fold, valuing the company at close to $4.7 trillion — more than 20 times its projected revenue for the fiscal year ended January 25.

Palantir stock has jumped about 25-fold, giving the data-analysis company a $375 billion market value, or around 85 times its forecasted revenue for 2025.

Gordon told Business Insider in an email last week that he doesn’t expect the AI bubble to burst in the next few months, as investors still have enough cash to “prop it up,” and technological advances remain “exciting enough to distract” from irrational valuations.

The veteran professor has previously rung the alarm on an “order-of-magnitude overvaluation bubble,” and warned that when it pops, the “suffering will be more painful” for investors than the aftermath of the dot-com bubble. But stocks have largely defied his warnings and continued to march higher.